This begs the question: why? Why the emphasis on disability insurance?
Why is so much emphasis being put on disability insurance?
It’s because – as a young person – securing disability protection is one of the most important financial planning moves you can make.
Why is Disability Insurance so Important?
If you have the read article on the basics of disability insurance, you know that disability insurance is income-replacement insurance. Disability insurance gives you money if you can no longer work.
As a young person, disability insurance is extremely important because it protects your most valuable asset: you – and your earning potential.
. . . disability insurance is extremely important because it protects your most valuable asset: you – and your earning potential.
To illustrate, let’s return to our favorite fictional Deloitte employee, Joe Danger, CPA:
Joe Danger is at Deloitte’s holiday party. Anxious about the pending busy season, Joe imbibes several White Russians to calm his nerves. Unfortunately, Joe Danger does not make it home in one piece. And now due to a drunk driving accident, Joe is no longer able to perform his duties at work. After depleting his emergency fund, his 401(k) account and the benefits on the base disability insurance policy offered by Deloitte, Joe has absolutely no money left to his name. He is completely destitute.
For a young person, having a solid disability insurance policy is critical to preserving your quality of life. This is in contrast to a partner at Deloitte. This is because a partner at Deloitte already has a sizable asset base built up: retirement plans, pensions, savings accounts, and home equity. Consider an example of a partner at Deloitte, Partie McPartnerstein:
Unfortunately for Joe, the individual he hit in his drunk driving accident was his boss’s boss’s boss’s boss: Partie McPartnerstein. Partie is a partner at Deloitte, and at age 59, Partie has had quite the career at Deloitte.
Partie has taken advantage of Deloitte’s pay package to save for his retirement, as well as to invest and purchase real estate. However, like Joe Danger, Partie McPartnerstein did not do any disability insurance planning – with the exception of taking the free base policy provided by his employer Deloitte. No longer able to make a living working for Delolitte, Partie must now live off his savings, pension and real estate. Fortunately for Partie, the combination of all these assets will provide for Partie until the end of his life.
By looking at the chart below, it’s pretty easy to see that both employees of Deloitte have different levels of assets.
It’s also quite easy to see where each Deloitte employee’s most valuable assets are. Partie McPartnerstien’s long career at Deloitte has allowed him to save and invest his earned income. With just a few years until retirement, there is not very much money left for Partie to earn.
The opposite is the case for Joe. He is relatively young. As such, he has not had a large opportunity to save and invest money over his relatively short working career. However, he has a long career ahead of him – with the potential to earn millions of dollars.
Disability Insurance Protects Your Future Earning Potential
As a young person, your most valuable asset is the money you’ll make in the future! We are talking about decades and decades of income. This future income is way more valuable than your car, and likely any amount of money you have saved up, or any property you currently own. That’s why it is so important to insure your future income properly.