How to Insure Your Income: Why You Need to Insure Your Income Introduction
The concept of disability insurance got its start centuries ago in ancient China. Chinese laborers paid their doctors as long as they remained well and were able to work. They stopped paying the doctors whenever they became ill.
By most historical accounts, it was an effective way to address the financial hardships incurred when a person became disabled and was unable to work.
Unfortunately, this concept doesn't appear to be workable in today's society.
People will insure their home, their cars, their things. But they'll often forget to insure the asset that pays for all of these -- their ability to earn money. The financial problems created by what insurance experts call economic death due to a disability are very real and distressing to most people.
Consider the following example: Bill, age 42, is the owner and president of Acme Inc., a 20-year-old, small but successful business that serves the automobile industry. Acme employs 30 workers and, for the past five years, it has averaged $18 million in gross sales. Bill has worked hard to achieve his success -- and the comfortable lifestyle he and his family enjoy.
Unfortunately, the day finally comes when Bill has to pay for the long hours, the skipped meals, the heavy smoking and the stress of operating his own business. He suffers a stroke, which leaves him partially paralyzed and unable to speak clearly.
Bill's wife calls their insurance agent to tell him what has happened and to find out which of the many policies Bill has will take care of this situation.
Much to her shock, none of them do. Bill has three life insurance policies with a total death benefit of $800,000. But he's not dead. He has several business insurance policies, group hospitalization insurance and other policies covering his family's home, automobiles and posessions. But he has no disability coverage.
Bill was diligent about protecting his assets -- except the most important one...the ability to earn an income.
The very thing that enabled Bill to establish a successful business and acquire his business and personal assets has been left unprotected. Within two years of Bill's stroke, his savings and most of the cash value in his life insurance have been exhausted. He's finally forced to sell his business to a competitor at a substantial loss.
A hard irony: His family's lifestyle and finances probably would not have been affected so dramatically by Bill's death. If he had died from the stroke, his family would have received his life insurance proceeds, Social Security survivor's benefits and other cash assets.
The financial impact of total disability may be greater than the financial impact of death. You may live for many years totally disabled, and therefore unable to generate an income to pay for the higher medical and living expenses caused by the disability.
Disability income insurance is designed to protect your most important asset -- the ability to earn an income. It's a form of health insurance that provides periodic payments when you are unable to work because of an injury or illness. These policies pay a weekly or monthly income benefit to replace a portion of the salary or wages lost due to your inability to work.
To get a feel for the value of a person's ability to earn an income, look at the following chart:
Potential Earnings to Age 65 (Total Dollars, Based on Monthly Income)
| Age | $2,000 | $4,000 | $6,000 | $8,000 |
| 25 | 960,000 | 1,920,000 | 2,880,000 | 3,840,000 |
| 30 | 840,000 | 1,680,000 | 2,520,000 | 3,360,000 |
| 35 | 720,000 | 1,440,000 | 2,160,000 | 2,880,000 |
| 40 | 600,000 | 1,200,000 | 1,800,000 | 2,400,000 |
| 45 | 480,000 | 960,000 | 1,440,000 | 1,920,000 |
| 50 | 360,000 | 720,000 | 1,080,000 | 1,440,000 |
This chart illustrates that most of us are destined to be millionaires, in the sense that our ability to earn an income will generate more than $1 million in an average lifetime. And this chart doesn't include things like pay raises or cost of living increases.
