By: Jovan Johnson, MBA, CFP®, CPA/PFS
The greatest asset that you have is your health and ability to do your job. Your earning potential is what will fund your long-term financial goals. You have already devoted so much time to your education and training, with that in mind, one of the first steps to your financial planning journey should be to protect yourself.
When most professionals think about financial planning, the first thing that comes to mind is investing. While this is a core piece of the financial planning puzzle, there are many other pieces that are just as important, if not more. Insurance and risk management fall into that bucket. Many young professionals make the mistake of only focusing on investing while forgetting to protect their most important asset, themselves. In this article, we will discuss how you can protect your income both now and in the future.
Protecting Your Income
It is so important to protect your income. For example, if you are a new medical professional, you probably have a large amount of student loans. If you were to become disabled, you want your income to be replaced at a reasonable level to maintain your lifestyle. Without income replacement, any accident or disability could hinder your ability to achieve your long-term goals. Research shows that just over one in four of today’s 20-year-olds will become disabled before they retire.
How Can I Protect My Income?
Disability Insurance is the solution. While you are in your wealth building phase, it is important to protect your income. This will ensure that you are still able to achieve your goals in the event that something happens. The goal of disability insurance isn’t to make you wealthy, but to replace your income. This will help you to continue living your life as “normal” without financial stress. There are two types of disability insurance: short-term and long-term policies. Short-term policies typically pay up to 80% of your gross monthly income and can cover up to 3-6 months. Long-term policies typically pay up to 60% of your gross monthly income and can cover your income up to retirement.
Many employers offer a short-term disability insurance policy at no additional cost to their employees. While only some employers offer long-term disability insurance for an additional cost to their employees. The key thing to remember about employer-sponsored disability insurance, is that if you leave or lose your job, the policy may not go with you. If possible, it is helpful to seek a long-term disability policy through a private insurer. That way, the policy is yours, regardless of your job. For purposes of this article, we’ll discuss long-term disability insurance.
What Kind of Policy Should I Consider?
Two of the most popular long-term disability policies are own-occupation and any-occupation. Any occupation is the most restrictive option, since it means if you are disabled and can’t perform ‘any” job, the policy will not pay. For example, if you are a Surgeon and become disabled for longer than six months and could not return to work, you would lose a lot in earnings. With an “any occupation” policy, if you were capable of working at a retail store, the disability policy would not pay. On the other hand, own occupation is not as restrictive. Using the same example above, an own occupation policy would kick-in and replace a percentage of your pre-disability earnings while you recover. With a brief background of the two most popular options, it is apparent that highly skilled professionals and high-income earners, such as medical professionals, should opt for an own-occupation policy.
Bonus For Medical Professionals:
There is an important add-on feature called the future increase option (FIO) that allows you to increase the limits on your policy as you earn more. This allows your income to be protected in your wealth accumulation years. If you are currently going through residency, this is a great way to still have disability insurance right now with the option to increase the limits once you finish. The best thing about this add-on feature is the opportunity to increase the coverage on your policy without having to undergo medical underwriting again. Another fact to consider is that disability insurance premiums are based primarily on your age and health. So, the earlier you purchase a policy, the more you can save on premiums in the long-term. Lock in the best premium while you are young and healthy.
Having a financial safety net in place will help ensure you achieve your long-term financial goals. Even if you have a short-term policy through your employer, coupling it with a private long-term disability policy will offer the most financial protection for you. Everyone should consider getting disability insurance, especially high-income earners, highly skilled professionals, and married couples that rely on two incomes. Also, if you have significant debt, it is important to consider a disability insurance policy. Always remember, that It is important to invest in yourself first.
Disclosures
None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning, LLC does not promise or guarantee any income or particular result from your use of the information contained herein.
