« Leather Coasters - Go Ringless! | Main | Personalization Goes To New Heights »
Money: Insure the Goose or the Egg?
Posted September 16, 2006 4:53 PM
Here’s a simple question. It’s not a trick. If you owned a goose that laid golden eggs, would you insure the eggs or the goose? If you said the goose, then you’re obviously an intelligent thinker who understands the future value of an asset. If you said the eggs, however, you’re actually in the vast majority of people. Most people answer the question by saying the goose, but in the real world, people are insuring their eggs and not the goose.
If I didn’t lose you yet, here’s the point. YOU are the goose. Your house, your car and your health are the “eggs.†You and your income make all of those things possible, but we all go out and get insurance for our car, our home and (hopefully) our health. Most people aren’t insuring their income. How do you do that? One way is by purchasing disability income insurance. Unless you’re a trust fund baby, your ability to go out and earn a living is the most important thing you have. Are you protecting your most valuable asset?
If you are involved in a serious accident or develop a long-term disabling disease, how will you continue to support yourself? Your spouse? Your kids? It's surprising to many people, but disability insurance is actually more important than life insurance. The Social Security Administration says “a 20-year old worker has a 3 in 10 chance of becoming disabled before retirement age.†A loss of income due to illness or injury was also found to be the leading cause of bankruptcies. So what do you do? For most workers, their home state usually offers some form of disability coverage which is deducted from your paycheck. However, this coverage is normally 60% or less of your current salary (not commissions!) and it is taxed as regular income, meaning after taxes, you’ll actually be getting less than half your normal paycheck, and usually the coverage ends after only one year. If you’re like most people, living paycheck to paycheck, being sick or injured and living on half your check just won’t cut it.
If your employer offers a group long-term disability plan, you may want to consider paying into it, but check for “portability,†that is, can you take the policy with you if you leave the company? In most cases the answer will be no. If you can afford to own your own disability insurance, that is always your best bet, but be aware; they are expensive compared to other insurance. Here’s what you need to know about personally owned disability insurance: Expect that you will only qualify for up to 70% of your current income, including salary and commissions (also, if you own the policy, any benefits you get are tax-free). Figure out what you need on a monthly basis and that is roughly what you’ll pay for coverage on an annual basis. (Example: if you need $3000/mo in disability benefits, the insurance will cost you roughly $250/mo.) That is a very rough estimate. Costs go up as you get older and if you are in a field that’s considered “blue collar.†Costs go down if you’re in a “white collar†job or younger. Get a policy which is non-cancellable and guaranteed renewable. This guarantees your rate will never increase and they can’t cancel you.
Here’s the bottom line: If you depend on your income to pay the bills and keep a roof over your head, whether you’re single or married, you must have disability insurance.
Next column: Your 401k is the greatest vehicle you have to secure a comfortable retirement. We’ll look at why it’s in your best interest to take the hit now and max out your contributions. We’ll also look at what you can do if your employer just won’t get on the 401k bandwagon.
