Column 96 - Insuring the Money machine!

Insuring  the Money machine!

 

One of the best things about my work is that I get to meet really interesting people and I occasionally get to have some fun.  Early in my career, I was trying all kinds of ways to meet people to talk about insurance.

I was 24 years old when I started in this business.  My husband and I had lived here for only under a year.  My local employment history included working the graveyard shift at Jerry's restaurant on North Market St. I didn't exactly meet a lot of high income prospects on that shift.  (But, oh do I have some good stories!)

One of the things I did to attempt to meet people, was to have a booth at the home show.  I invited people to look behind a curtain and see "the money making machine". 

Upon entering the booth, they saw their own reflection in a mirror and a sign that said, "THIS IS YOUR MOST VALUABLE ASSET- You & your ability to earn an income!  Shouldn't you insure it?"

Truth be told, I didn't get a lot of clients from that endeavor, but I did have a lot of fun.

 

May is Disability Awareness Month which is a good time to talk about the possibility of disability and how you might protect yourself.  There are a variety of types of insurance products that will replace income if you can't work due to illness or injury.

 

1) Disability Insurance:  Covers many conditions that fall under a general definition of disability. This is the broadest type of coverage.  It can be social insurance such as State Disability Insurance, Social Security Disability, Workers Compensation or Veterans benefits.  Or it can be private coverage such as individual or group disability income plans.

2) Critical Illness Insurance: Policy will list the different illnesses that are covered.

3) Cancer Insurance: Only covers disability resulting from cancer.

4) Accident Insurance: Only covers disabilities that are caused by accidents.

 

There are several factors that affect the policy premium. In a typical disability income policy those are:

1)    Age: older you are, higher the premium

2)    Health history: pre-existing conditions matter for this coverage

3)    Occupation:  riskier job, higher premium

4)    Amount of coverage: higher the benefit dollar amount and/or length of payout the higher the premium.  The lower the elimination or waiting period before you collect benefit, the higher the premium. 

5)    Benefit provisions: Optional features like Cost of Living Adjustments, Guaranteed Purchase Option riders, Specialty Occupation clauses will increase the premiums.

 

Typically insurance companies will not insure you for more than about 60% of your pre-disability earnings.  That is because many of these benefits are received income tax free. They do not want to create an incentive for an individual to become disabled.  If your disability insurance claim payment is almost equal to your take home pay, it can make that stress disability look rather attractive.

 

The challenge in CA for those wishing to buy individual disability income is underwriting.  In many cases a lower income earner will have adequate coverage for a long term disability with the social insurance already provided.  That would include state disability income for short term and Social Security for long term.

 

Higher earners, self-employed and professionals are those that often have the highest risk in the case of a disability.  Most people adapt their lifestyle to their income and in turn have higher obligations.  I once had a banker joke that in his experience, most people live on just about 10% more than they take home. 

 

So, if that money machine isn't functioning or is down for a period of time, financial disaster could soon follow.  A solid financial plan includes an emergency fund of 6-12 months of income. This level of savings allows one to buy a policy with a longer waiting period for benefits, but doesn't mitigate the risk of a long term disability.

 

Next week, I will share some of the statistics about disability to help you evaluate how much risk you want to take with your "money machine".