When most business owners decide to buy insurance to protect their families, they automatically think of life insurance. Few business owners also consider the purchase of disability insurance—67 percent do not have any type of disability insurance. This is a big mistake. Personal disability insurance is just as important as life insurance and should be considered part of your financial planning strategy. It’s a powerful tool that is needed more often than people realize.
Accidents happen every day. According to the National Safety Council, almost 1,500 people a day experience an accident which deprives them of the ability to work. Nearly one third of working age adults will suffer an accident or illness at some point in their careers that will prevent them from working for at least three months. What would happen to you, your family, and your business if this happened? Even worse is the fact that one in four 20-year-old adults will become disabled before reaching age 67.
It’s not worth taking the risk of not having insurance. The nonprofit Life Foundation estimates that nearly 70 percent of working Americans have less than one month of income in savings. Around 25 percent have less than one week of income in savings. If you fall into this group, then any type of disability could have dire financial consequences.
Personal disability insurance protects you against these risks. If you suffer an accident or illness that keeps you from working, the insurance provides a portion of your previous income until such time that you can return to work. In some cases, it can also cover differences between your previous income and your post-accident income if you can no longer earn the same amount of money for health reasons. Policy terms vary, but in most cases personal disability policies replace from 40 percent to 60 percent of your income. For business owners and self-employed individuals there are polices that cover slightly more.
Many people make the mistake of relying on employer-based disability insurance or Social Security to cover their disability needs. Even if your company offers a disability policy, that usually just covers accidents that take place at work or while performing work-related duties. If you’re playing basketball or moving furniture in your home when something happens then you won’t be protected.
Relying on Social Security disability insurance (“SSDI”) is also quite risky. The process for having an application approved can be quite lengthy and the benefits are limited. According to the Social Security Administration, the average benefit for a disabled worker receiving SSDI is $1,068 per month.
If you are a high earner there are additional policies available known as high-limit disability policies that provide additional protection for incomes up to $100,000 per month. The premiums are significantly more expensive but if you are in that income range and have a lifestyle to match then it’s worth the investment.
Protecting your family from the financial burden of you not being able to work is essential. After your family is protected, it’s time to think about your business. If you do become disabled, your company can be protected by a key-person disability insurance policy. These policies typically cover the cost of hiring temporary help to replace you if your disability is short-term. If your disability is permanent, it can defray the cost associated with recruiting your replacement and the operational costs of replacing you.
It’s true that no one wants to think about the consequences of becoming disabled but I have never met a person who didn’t have protection that became disabled and didn’t regret the lack of protection.