How to Have Fewer Worries in a Difficult Time

What would you consider to be your most valuable asset?

Your car? Your investment portfolio? Your home? This might surprise you, but it's likely none of these.

When assessing the value of your assets, the one that's worth the most to you and your family is your ability to earn money. This may seem a little abstract because many of us don't see that far beyond what our next paychecks will provide for, but when you calculate the money you'll earn over the course of your career, your cumulative income will likely have much greater value than anything you'll ever own.

For example, a 40-year-old making $150,000 a year will earn $4,500,000 up to age 70 at a level income. However, when you estimate raises and cost of living inflation at an annual rate of 3%, the average income over that same 30-year period jumps to $237,877 per year, for a total of $7,136,312. Generally speaking, you'd be hard-pressed to find someone whose home or stock portfolio are each worth $7 Million, let alone a car or other large personal item. Such is the case; your total earned income will almost undoubtedly be the single most important and valuable asset of your entire lifetime.

Needless to say, your overall quality of life is a reflection of your income, and that includes your lifestyle as well as necessities. Subsequently, it's their quality of life that helps to keep your loved ones happy. But what would happen to your family's quality of life and overall happiness if your income disappeared, or, even worse, you lost your ability to earn money? According to The American Payroll Association's "Getting Paid" Survey (2021), 63% of Americans admit that it would be difficult to meet financial obligations if their paycheck was delayed by just one week. This means that a majority of us would see a direct decrease in our family's happiness and well-being if we went without just one paycheck. Your family will already have enough emotional trauma to reconcile in seeing you struggle with a disability, and their ultimate happiness will be achieved when you return to health. So, if your ability to earn money, and more specifically the amount of money you're accustomed to in order to maintain your lifestyle was suddenly sacrificed, your family's difficulties will only be compounded. Perhaps you can stem the tide for a little while, provided you had access to adequate savings. Still, if you had to go an extended period of time without your income, how would you intend to make ends meet? Furthermore, what would be the longer-term consequences of dipping into your savings for a purpose such as replacing your income?

This is just one of the challenges we face when experiencing a disabling event that sabotages our ability to earn our income. And the possibility of going on disability is more common than you might realize. In fact, 1-in-4 Americans will suffer some sort of disability during their working years and that can happen early on just as frequently as later in our careers (Simply Insurance "95+ Disability Insurance Stats and Disability Facts", 2022). Now, a 25% chance of disability may not seem so significant, but that really depends on what's at stake given those odds. If you saw on your local weather report that there was a 25% chance of rain, you'd probably go about your day just as you had intended to and wouldn't even take an umbrella with you when you went out. But, if you knew there was a 25% chance you'd get hit by a car on a particular day, you probably wouldn't even leave the house.

Obviously, it's not plausible that there'd be a 1-in-4 chance of getting hit by a car on any given day. But those very real odds exist that you'll have a disabling injury or illness during your working years, for which you'd need to be protected. That protection comes in the form of New York Life Disability Insurance. How then, does Disability Insurance work and what are its associated costs?

Think about it like this:

Let's say you put 100% of your money into the stock market and your plan was to use your gains to backstop your income as an emergency fund, which also accounts for lost wages. Well, you could certainly gain in the market. But, as we all know, you could also lose, and we won't even get into your stock portfolio's hefty tax exposure here. Or maybe you have a real estate portfolio and figure if faced with a cash crisis, you could simply sell some of it off. That's fine if you knew that if the For Sale sign went up on Monday, you'd have the property sold and the proceeds in the bank by the following Monday. However, such an outcome is nearly impossible and it's extremely rare that you get what you think your real estate is worth; you almost always get less than you'd hoped for.

Going back to the first example, if all you had was market risk as a strategy for backstopping your income, what's your potential income loss should you suffer a disability? It's 100%, which means your cashflow will be 0. That's right. You will have no money coming in with which to support your lifestyle, let alone put into the stock market. By contrast, if you took 2% to 4% of your income, and put it into DI, you could replace up to 60% of your income in the event of a disability, meaning your loss potential is capped at 40% rather than 100%.

A study conducted by Kiplinger in 2020 found that the average disability claim lasted 34.6 months. That's basically three years (!) without income. The question then becomes, would you prefer to have 100% of your money in the stock market but risk a 100% loss should you be disabled? Or, would you rather have 96% of your money in the stock market, where you can still experience all of the market's upside potential, and use the remaining 4% to guarantee that your loss will never be more than 40%? Looking at it another way, if you made $100,000, would you rather have all of it in the equities markets but risk having no income if you were disabled? Or would you rather have $96,000 in the stock market but still get $60,000 in income if you were disabled? Keep in mind, you can still profit in the market. If the market enjoys a 20% rally; you'd make $19,200 on the $96,000 and you're getting $60,000 in cashflow on top of that, as opposed to $20,000 if you had $100,000 invested but a cashflow of $0. Based on the Kiplinger study, if you earned $100,000, the average Disability claimant stands to lose almost $300,000 of income. Yet if that same claimant carried New York Life DI, the loss is capped at less than $120,000.

If you think that Social Security offers reliable income replacement for Disability, think again. In its study entitled "What Are the Chances of Winning a Social Security Disability Appeal" (2020), personal injury attorney Riddle & Brantley found that 70% of Social Security claims are initially denied and the appeals process can take years to resolve. Besides this, the Social Security Administration's own 2022 Statistical Snapshot declared that the average SSDI monthly benefit payout was $1,226, which is well below the federal poverty guideline of $1,500 per month for a couple and $2,300 per month for a household of four according to the US Department of Health and Human Services. By the same token, only 10% of disabling circumstances occur as a result of occupational responsibilities, meaning that Worker's Compensation likely wouldn't cover 90% of disabling events, and Worker's Comp has other limitations that would make it inadequate to support your family's needs.

Lastly, keep in mind that 90% of disability is a result of an illness, not an injury. This means that DI is appropriate for anyone and not just those in physically demanding or hazardous jobs. Illness can strike anyone, at any time, and for a variety of reasons, for which we all must be prepared.

The bottom line is, we insure many of our possessions for more than they're worth relative to our own earning potential. If your car that's worth $40,000 brand new is insured, shouldn't your accumulated income, which is worth millions of dollars also be insured? The purpose of any insurance is to allow your assets to function as you intended them to. Being in a position where you're not earning income for an extended period of time is challenging and stressful enough but then drawing from your other assets in order to provide a suitable quality of life and happiness for your family while you're disabled will deplete your wealth and multiply your difficulties by depriving other facets of life of those funds. The modest percentage of your income you invest in DI will likely not cause you to sacrifice your quality of life, it will still leave you with more than enough to invest in other places, and it will backstop you with a robust percentage of your income so that you and your family can enjoy the peace of mind that their quality of life remains intact.

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If you have any further questions about Disability Insurance or would like to get started on some strategies that New York Life offers for implementing it into your financial plan, please reach out to me. I'd be delighted to work with you!