Q: Hi, Steve. I am self-employed. I have life insurance and medical insurance. My wife thinks I need to also get disability insurance, but I am not sure I can really afford it. Do you think it is necessary? Thanks
A: While I understand your plight, Justin, I am more sympathetic to your spouse's concern. She is on to something.
Here's why: What would you consider to be your most valuable financial asset? Most people say their home, but I don't think so. Is it your retirement plan? Again, the answer is probably no. Your business? Nope. For most people, their most significant asset if their ability to earn a living.
Let's say you net $50,000 a year in your business, and that you are 40 years old. Even if your income did not grow at all (highly unlikely), your earning power over the course of your working life is $1.25 million ($50,000 x 25 years.) Now that is a significant asset.
I saw a recent study that indicated that almost half of all bankruptcy filings were due to illness or injury, making disability insurance far more important than life insurance insofar as financial security goes. And, according to the Health Insurance Association of America, almost a third of all workers aged 35 to 65 will have an injury or illness sometime during their career lasting at least 90 days.
So, not only is disability insurance generally important for the average worker, it is specifically important for the self-employed.
Here is why: When an employee gets ill, he or she typically can tap into some sick time, and maybe some vacation days, with which to get paid, and get better. But we entrepreneurs have no such luxury. What would happen to your business if you got seriously injured or ill? Many small business owners do not have back-up systems in place that would permit the business to continue to run, or at least run efficiently. And if your income stream dries up, then what? Then you are in even more trouble, that's what.
That is why disability insurance is so important for the entrepreneur. The typical disability insurance payment will give you about 70% of your gross income. While not perfect, it sure beats losing 100% of your income.
There are two types of disability insurance:
1. Short term: A short term disability payment will send you a weekly check for up to two years.
2. Long term: A long term policy will pay you for two years, five years, up to ages 65 or 67, or for the rest of your life.
Whether you are shopping for short or long term insurance, there are a couple of things to keep in mind:
First, you want to buy any insurance, but especially disability insurance, from a carrier that is stable, and fair. The last thing you need is a carrier who is unable or unwilling to pay a legitimate claim.
Look to buy what is known as a "non-cancelable contract." This is a policy that locks-in your rate and benefits. Avoid what is known as the "conditionally renewable" policy, meaning that the insurance company can alter your benefits or rates.
Finally, you will want a disability policy that specifically defines what it is you do. This is known as an "own-occupation disability" policy.
You are right when you say buying disability insurance is going to be expensive – that is probably true (up to 3% of your gross income). Premiums are based on your age, health, history and the amount and type of coverage you want. No, it is not cheap, but it sure beats missing, say, six months of work and having no coverage at all.
Today's tip: If you want to learn more about the insurance companies you are considering purchasing from, you can check them out online at Moodys.com or Standardandpoors.com.
© 2010 Steven D. Strauss, “America’s small business expert.” www.MrAllBiz.com