As many of you who have read any of the blogs I have written know, I work with people in the You’re On Your Own Economy or Y.O.Y.O. Economy. The other thing I talk about is P.A.I.L. which stands for Protection, Asset Management, Income for Retirement and Leave a Legacy. Today, I am going to talk about why you should insure your most valuable asset, which for most of us if our ability to earn an income.
I am going to share three graphs from a software program that I use so people can see why I think it is so important to protect your ability to earn an income with disability insurance. Here we go!
What Your Income is Worth
Here are my assumptions. 40-year-old person, making $100,000 per year, 3% increase in income each year and retires at age 67.
As you can see, this person will make $4,293,080.00 over this 28-year period. If I were to do a present value calculation using the same 3% cost of living adjustment, this stream of income is worth $1,876,405.47.
Value of Income versus Other Assets
The value of the house in my example is $350,000. I said the primary vehicle is worth $50,000 and the second vehicle is worth $30,000. The point of this chart is to show the significant difference between the assets we think are valuable, like the house, and the asset that is your most valuable. Even if I were to inflate the value of the house at 3% each year for 28 years, it is still worth $800,775.00. This pales in comparison to the value of someone’s ability to earn an income.
Here's another point. Everyone has their houses insured. Most people have their cars insured. People even buy insurance on their cell phones. I have seen statistics showing 50% of Americans going with no coverage on their most valuable asset. This doesn’t make any sense!
Here’s an Example of What a Short Disability Costs
Here are my assumptions for this example. My 40-year-old person is actually one of the lucky people who has disability insurance through his job. He’s the guy who tells me he doesn’t need to talk about disability insurance because he has it taken care of. It turns out to be a fairly typical group contract that covers 60% of his income up to $5000.00 per month. That is shown in the blue.
The average disability lasts for 31.4 months. I showed this disability lasting for three years and starting at age 52. As you can see at the top of this chart, the loss of income costs him $275,687.00. That’s almost as much as his house is worth.
What Happens If You Die?
This graph shows the income loss if this person died at age 52. That’s all.
What Should You Do?
Financial planning is more than just saving money for retirement and picking the right investments. While that is super important and something I talk about every day, bad stuff happens to people all the time. They fall off their bicycles, they get cancer, they get hit by a car crossing the street, they have a tumor on their eye and can’t do a part of their job, they are a dentist and break one of their fingers playing flag football, etc. etc. etc.
When that stuff happens, it can cost you a lot of money. Make sure you have insurance to protect your most valuable asset. Everybody’s situation is different, but I tried to share an example and some numbers that are realistic. If you want to talk to me, schedule a phone call HERE. As the guy who fell off his bicycle, I know how important it was to me and my family to have the proper disability insurance. As always, thanks for reading! KB