Thought I would share with you some common questions that my clients have asked me about income protection.
Do I need to protect my income?
I think the better question is, could you afford the consequences of not having long term disability insurance? Undoubtedly your income is very important to you. Your way of life depends on it. Most individuals understand this simple fact and, therefore, take appropriate measures to protect their most important asset — their ability to earn an income.
I heard disability insurance can be expensive?
It’s more affordable than you may think. Most disability policies cost 1% – 3% of your annual income. The best time to purchase disability insurance is when you are young and healthy. Remember, money funds the policy but health buys it. As soon as you have a medical concern, the insurance company would likely exclude anything to do with that medical concern or decline you for coverage altogether.
Isn’t my group disability insurance enough?
Many individuals do not understand their group coverage or how much it actually pays out. Is the amount taxable or tax-free? What’s the definition of disability? Does it cover your income earned from dividends, commissions and/or bonuses? You first need to know how you are covered in order to answer this question. You don’t want to find out these answers at time of claim.
What exactly is disability insurance protecting?
Disability insurance simply protects your paycheque in the event that an injury or illness prevents you from working. There are different definitions of disability in the market. You should look for a contract that provides you with a “regular occupation” or “own occupation” definition and stay away from contracts that carry the “any occupation” definition. This will prevent the insurer forcing you back to work in a different occupation at a lower pay.
How much is your paycheque worth? Take a second and do the math. If you are 35 years old earning $80,000 per year, you would earn $2.4 million in income by the time you are 65. This does not take in consideration that your income should increase overtime with inflation. If you factored in a 3% raise each year, you would earn $3.8 million by the time you are 65.
How much income protection do I need?
You can protect two different things with disability insurance. One being you’re fixed expenses, this would include items such as your mortgage, car payments, utilities, taxes, child care, investments, etc. The other thing you may want to protect is your lifestyle, this would include things such as your shopping, entertainment, traveling, hobbies, etc. I would always recommend to have at least enough coverage to ensure that you can pay all of your bills during a period of disability. That being said, many clients worked hard to get where they are today and enjoy their current lifestyle. It would be difficult to adjust these spending habits during a period of disability and this is why you should protect the amount of income you currently spend to prevent any financial stress at time of claim.