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Disability insurance: its role in insurance planning |
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In insurance planning for individuals, the importance of life insurance, property and casualty insurance (such as automobile or homeowners) and medical insurance is understood by many. Disability insurance is often forgotten or ignored. Insurance exists to protect the financial future of the insured and the insured's family. The whole point of it is to protect against possibilities that would create too much financial damage for most individuals or families to bear.
Few homeowners would be without a good homeowner's policy to protect both the home as well as the contents.
Modern medicine has caused health-care costs to rise so rapidly that even a minor surgery combined with a short stay in the hospital could be financially devastating to many families if they did not have good medical insurance. Clearly, health insurance is essential.
Life insurance for many is designed to provide income lost to a family in the event of the death of a breadwinner or breadwinners. It is interesting to note that many people realize the importance of life insurance as a device to protect their families, but overlook disability insurance. This is critical because of probability of one becoming disabled during his or her working years is greater than dying.
There are many types of insurance to protect individuals from financial devastation from a number of different risks. Interestingly, the values that are being protected ordinarily come from one source and that is earned income. Earned income is, for most families, the source of financial security and stability. Even a relatively short-term disability could be to devastating most families' financial situations. For example, someone saving 10 percent of their yearly income over a ten-year period could possibly lose all of those savings if that person became disabled for one year.
Any individual who relies on their ability to earn income to pay bills might be a candidate for disability income insurance. Obviously, when income stops or is interrupted by disability, bills for food, clothing, education, medical insurance, utilities, rents or mortgage continue.
The human life value concept may be used in estimating amounts of life insurance necessary and also can be helpful for determining the amount of disability income insurance needed. Human life value is a person's economic worth. Said another way, it is the capitalized value of an individual's net future earnings. Obviously, death is a threat to the asset that is human life value. However, disability without disability insurance can be even worse. This is because not only could disability stop an individual from creating earned income, but that individual's disability could generate additional expenses and require time and care from other family members. If a two breadwinner home has one of the breadwinners disabled (without disability insurance) not only is that income lost but the healthy person may need to stay at home to care for the disabled person and could lose time at work. Disability income insurance is a critical planning component to protect the family against this terrible risk.
Single individuals with no dependents may not have an immediate need for life insurance but should definitely consider disability insurance for two reasons. First of all, if they are on their own with the need to earn income to support themselves, the need for disability insurance is obvious. Second, many individuals who are single today will one day marry and have families (and this is also a reason for single individuals to consider having some life insurance in addition to disability insurance). Similar to life insurance, a good disability insurance policy, especially a noncancellable and guaranteed renewable to age 65 policy, normally has a lower premium when purchased at a younger age. While an individual who is single should have some form of disability insurance unless that person has enough income producing assets to allow that person not to have to work but still maintain a comfortable lifestyle, it is even more critical for a single parent to have disability insurance. If the parent has custody of the child, coverage that provides income in the event of the parent's disability is essential. If a single parent is making child support payments, a disability that severely reduces his or her income could force the parent to stop making these child support payments, which could create a real hardship for the child.
Building some sort of disability insurance provision into separation agreements or divorce settlements could be a valuable approach to help guarantee that the parent responsible for child support payments (and even perhaps alimony) could continue payments in the event of a disability.
Sometimes individuals in a two income household might believe that disability insurance may not be very important. If the two income family is able to save the higher of the two net incomes, it could be argued that they "don't need" disability insurance. This level of savings might not be very likely. Furthermore, they may feel that they could "cut back" if a disability struck. Interestingly, these households probably have collision on their automobile insurance policies. The point here is there seems to be no objection to insuring something worth $20 or $30,000 (i.e. the cars), but insuring their ability to earn income, which could be worth well in excess of $1 million is something they prefer not to do.
Of keen interest here is if they can afford some disability insurance, why not have it?
And most importantly, if they feel they can't afford it, how could they ever afford a disability? The real question is if one of them were to become disabled, could the family still pay all of the bills and set aside money for retirement? One last thought is, while it might not be likely, there is a chance that both of them could become disabled at the same time. In this situation, would they really prefer to be without disability insurance?
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Policy Forms 0100, 1100 and 2100 are underwritten and issued by Berkshire Life Insurance Company of America, Pittsfield, MA, a wholly-owned stock subsidiary of The Guardian Life Insurance Company of America ("Guardian"), New York, NY. Policy Forms NC111 and NC112 in CA are provided by Guardian. Product provisions and features may vary by state. |
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