Do you need Disability Insurance?
A commonly overlooked important financial strategy, is having appropriate Disability Insurance.
Excerpts from the Book - Preserving Wealth - written by Jack Lumsden, MBA, CFP®
What is disability Insurance?
If you are unable to perform your job due to accident or illness, a disability insurance policy will pay you a monthly income.
So why should you have disability insurance?
Some great research from Morningstar’s David Blanchett and Philip Staehl, discuss the key aspects to a financial and retirement strategy as follows:
- Human Capital – your ability to earn an income.
- Real estate assets – your home.
- Financial assets – savings such as RRSPs, TFSAs etc.
- Pension assets – Government plans such as CPP and OAS. It also includes company pension plans.
When you first start to work, your largest asset is human capital, which is your ability to earn and income. Over time you transfer your human capital to items such as RRSPs, TFSAs, business assets, company savings plans, and real estate.
At some point, you will have transferred enough of your human capital to the other assets, and at that time you can make the decision if you wish to continue to work or not.
So, the reason you need disability insurance, is that your largest financial asset for a great portion of your life is your human capital and this needs to be protected.
The following excerpt from the Book - Preserving Wealth, that reviews this:
“How about disability insurance?” Alice asked. “Do you think we need any on David, or are we okay now that we have his inheritance?”
“You’re getting too sharp for the rest of us,” Uncle Wayne replied. “I almost forgot about that, along with most of the rest of the population.”
Sally perked up and once again displayed her considerable knowledge on the subject. “Everyone should have disability insurance. If you can’t perform your job due to an accident or ill¬ness, it pays you up to 65% or 70% of your regular income. Most people who work for large compa¬nies may have some disability coverage through group plans, but the coverage may be limited, and you might want to consider an individual plan custom-tailored to your needs.”
“Well now,” I said, “what does our insurance expert have to say about Employment Insurance, and the Workers’ Compensation Plan?”
“These are very basic plans, Jack. A pay-out from EI only lasts from about fourteen weeks to a maximum of forty-five weeks, depending on where you live, while Workers’ Compensation only covers on-the-job accidents, and besides, when you look at the deficits so many governments are racking up, do you really think you can rely on them to take care of you?”
“I wouldn’t,” I laughed, “unless of course I was a Member of Parliament and could give myself an indexed pension, where I get a lifetime guaranteed income that can increase every year with inflation when I retire.”
“Do you think I need disability insurance?” Mark asked.
Sally was starting to run out of patience. “If you couldn’t do your job, a disability policy would pay you a monthly income so you could cover your bills, buy food, and put gas in the boat. Perhaps you’d rather use your inheritance to pay for those things, and risk the comfortable retirement you had planned, while leaving behind less money for your kids. It’s your choice.”
“Okay then,” Mark asked, “under what circumstances would I not need disability insurance?”
“You could forgo a disability policy if your financial assets would produce approximately the same income that you earn on the job. Your ability to earn an income over the years is really your largest asset, and it should be insured. By the way, at your age you have a greater chance of becoming disabled than you do of dropping dead.”
“Isn’t that a lovely thought,” I said.
“What about our policies through work?” asked Sandra.
Uncle Wayne handled this one. “If I were you, I would find out what the monthly benefit would be, and how the policy defines the word ‘disabili-ty.’ If the policy doesn’t provide about 65% of your current income, you should at least investigate buying an individual plan to top it up. Assuris protection provides guarantees for disability policies, but only up to $2,000 per month per payment. So, as we discussed in the case of life insurance, you should not only look at the premiums but the strength of the insurance company.”
For more information you can refer to Preserving Wealth: The Next Generation - The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®
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Jack Lumsden, MBA CFP® Financial Advisor, Assante Financial Management Ltd.
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