Disability Insurance for Millennials 101 – Disability insurance coverage is economic protection for your most valuable possession- the ability to function and gain a revenue. So why is it so frequently neglected and misinterpreted?
Home owners insurance coverage safeguards where you live. Vehicle insurance secures what you drive. Medical insurance protects your wellness.
Yet what shields your capability to work and also earn a revenue? That’s what permits you to pay for all of the above (and so much a lot more).
To safeguard on your own against the risk of shedding your income due to injury or disease, there’s handicap insurance. In this post, we cover whatever you need to learn about this vital, yet commonly neglected kind of insurance for your revenue
Disability insurance definition
Special needs insurance coverage is security for your best asset– your revenue. This type of insurance protection changes a part of your regular monthly revenue if injury or health problem prevents you from functioning.
Having special needs insurance policy gives financial security for you and any kind of loved ones that may depend on your capacity to make a paycheck. The impairment insurance coverage benefits you get from your policy can be made use of nonetheless you want, from regular monthly expenses and out-of-pocket medical expenses to childcare as well as groceries.
You might likewise hear impairment insurance described as special needs revenue insurance or income security insurance coverage.
Disability Insurance for Millennials 101
After you know disability insurance, then the next step goes to the main point of discussion about disability insurance for millennials.
$300,000. That’s how much the average Millennial office worker could lose without disability insurance. If you earn more than the average 25- to 34-year-old, you could be in the hole by much more. We protect our homes and our cars without a second thought, but very few young professionals I talk to have thought about protecting their biggest asset, their ability to earn an income.
In today’s episode I’ll be discussing the often overlooked, all-important topic of disability insurance. What really is disability insurance you ask? The purpose of insurance is to protect the risk against a loss. You pay an insurance company a regular premium (typically every month), and when an event you’re insuring against happens, the insurance company will pay you the agreed amount. In the case of disability insurance, you are insuring your human capital.
Human capital is simply a fancy term for the current lump sum value of your future income stream. So if you made the average income of a 25 to 34 year old, $43,700 in 2016, you were 25, and planned to work until 65, ignoring raises and inflation, your human capital would be $1.75 million. That’s a big asset. If you became disabled tomorrow and could never work again, you’re losing out on 1.
75 million dollars of income over your lifetime.
How can insurance companies afford to pay you that, when your premium will never total that amount of money? There are a couple of ways.
Firstly, the insurance companies are able to pool risk. Everyone who pays for disability insurance coverage won’t become disabled.
So using lots of statistics and tables, the insurance company can calculate the probability of all their customers actually becoming disabled and charge appropriate premiums. If I never become disabled, my premiums will go towards paying a benefit to those who do become disabled and receive a payout from the insurance company, and vice versa.
Also, while disabilities can last an entire lifetime, many do not, so the chances that the insurance company will have to provide payments from age 25 to 65 are low. Therefore your premiums don’t have to cover that full risk. However, with the right disability insurance, you will be covered for that risk.
Disability insurance is important for both single individuals and those with a spouse and/or children. If anyone, including yourself, is relying on your income to cover expenses and save for the future, then disability insurance needs to be considered. As a millennial, I don’t know anyone with $1.75 million dollars lying around to use in case they are unable to work. According to RBC Insurance’s disability calculator, I have a 21% chance of becoming disabled for 90 days or longer.
The average length of a disability for someone like me is 80 months. My disability could be shorter than that, it could be longer, or it could be non-existent. I don’t have $300,000 lying around to cover my expenses for the next 80 months (in addition to any money I would need for retirement), and I definitely don’t have $1.75 million to replace my future income in case I become disabled for life. So I absolutely need some form of disability insurance.
I’ve linked the RBC Insurance calculator in HERE. I’ve included the RBC calculator for your reference only. I have no opinion on whether RBC bank or insurance offerings are better than others. I simply found this calculator personally useful and have not found another Canadian one that estimates your risk of disability. If you know of any other tools that estimate your risk of becoming disabled, please let me know in the comments below!
It allows you to plug in your own details and see what your chance of becoming disabled is, and how much income is at stake if you plan to work until age 65.
Depending on your age, gender, current health, and occupation, you can have very different chances of becoming disabled. For a 30 year-old, the chance of becoming disabled ranges from 14% to 45%. While I think everyone should consider their need for disability insurance, if you’re in the 45% chance of becoming disabled, I would absolutely make sure you’re appropriately covered as soon as possible.
Considering 35% of millennials don’t have any emergency fund set aside, becoming disabled for a period of time would absolutely wreak havoc on their lives. Do you have disability insurance? Have you had any experience with it in the past? I’d love to hear about it.
All right, so now you have read about the Disability Insurance for Millennials 101. What’s next? Give me a quick backup and let us know if you already understand the comments column below now.