Will Rogers once said that, “Just because a thing is common sense, does not mean it will be common practice.” Not much has changed in the 80 years since.
As an example, the most valuable asset most people have is the ability to earn income. They have other valuable assets too. Their home, their household goods, their jewelry, their car, and their teeth.
How many of these are fully insured against loss or damage?
All but their income.
We can agree that it is common sense to insure the things you value. After 30 years in the business, I can assure you that it is not common practice.
Maybe it is because people don’t know what their income is worth. Here is a handy chart showing the net present value of $1,000 worth of monthly after tax income. It assumes your capital will earn, after tax, 1% more than inflation.
|Per $1,000 Income After Tax / Month|
For example, a 35 year old retiring at 60 (25 years) and bringing in $5,000 per month now would need capital of $1,427,712 to be financially indifferent to being unable to work.
It is not the insurance answer. The table merely tells you what your job is worth. It tells you nothing about how much insurance you need. Whether it is for disability income insurance or for life insurance, it is not a bad place to start keeping things in perspective.
Your adviser can help you integrate other factors like debt, savings, new expenses like childcare, education savings, inflation and tax effects, government programs like CPP, new expenditures needed like house purchase or expenditure that might go away like clothing, work expenses, and recreation. One-income flexibility is very limited so risks are greater. You need to provide some of the big things.
Your amount of your reasonable insurance need is just a big arithmetic question.
Disability insurance has a capital value you can calculate too. For young people the premium is a tiny percentage of the capital value. If you don’t have the insurance and you don’t have the capital, what exactly are you planning to do if you get sick or hurt?
Both life and disability insurance needs change over time. That fact can influence the kind of insurance you buy but it should not influence the amount you buy now.
Almost everyone is under-insured when you relate the coverage to the value of the asset. Under-insured will not matter if you do not leave a financial footprint when something adverse occurs. Like you have neither debt nor dependents nor a need to spend money. For the other people, the ones with obligations and expectations, rethink the amount.
Everyone has an untidy financial life. You are never finished everything. There are always half-done plans and plans not yet started. If you don’t get the time, you will still need the money.
Insurance lets you be neat.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. email@example.com