What do you suppose is your largest asset? Let’s set aside your great personality, sense of humor, good looks, etc. Let’s focus on only your largest financial asset. What would you say that is? Some start looking at their financial statements to answer that. Others might consult with a realtor or www.zillow.com for their home value.
Odds are your biggest financial asset isn’t your portfolio or your house. It is the current and future value of the revenue you can generate in exchange for your time. Your income is your largest asset. It is also called your human capital. If you are a physician or other high-income earner your revenue value may exceed $6M over a lifetime.
We get very good at building the value of our human capital (through training and education). We then slowly convert this to financial capital over a lifetime of work. But what if your work life is cut short? Would that be a financial catastrophe? It may if you are not well-prepared.
You can improve your lifetime earnings by working on your skills, enjoyment, improving career longevity and decreasing burnout. There is a lot you can do to enjoy your time in the workforce. But not all career shortening events can be eliminated.
I have written elsewhere about how the role of insurance is to protect against catastrophic loss. This is a perfect example of where insurance is important. How can you protect your human capital? Two words: Disability Insurance!
Disability insurance can be complex. Your needs and premium price will depend on many factors:
Here are some of the questions you will need to consider (adapted from a list in, “The 7 Secrets of Extraordinary Investors.”)
- What is the policy’s definition of disability?
- What is your occupation and health status?
- What is the waiting period?
- What is the benefit amount?
- How long are benefits paid out?
- Should you opt for inflation protection?
- Will you need own-occupation? If so, is this only for two years?
- Would it payout a partial benefit for partial disability?
- Is the policy guaranteed renewable? Noncancelable?
- Will benefits increase with inflation after you are disabled?
- Will the income be taxable?
This is much more complex than life insurance which is determined by: age, health status, policy type, value of death benefit. If you don’t have a disability insurance policy currently, go get one. Be sure to understand the terms and conditions in your contract. You may need a professional to help you navigate the options.