Which costs more – living protected or exposed?

By Byron Moore, posted March 6, 2017

Originally published in the News Star and the Shreveport Times on Sunday, March 5, 2017.

Q: I have the opportunity to buy some disability insurance through a group of professionals I work with. But I struggle with wasting that money vs. how much more could I have if I just invested it. What do you think?

A: I think you need to understand your choices more clearly.

DisabilityI grew up watching Let’s Make a Deal with Monty Hall. Eager audience members would scream wildly, pleading with Monty to pick them to play the game. Once Hall had chosen someone to play, announcer Jay Stewart would bring down what looked to me like a TV dinner trey with small package on it. Then Monty would give the contestant the opportunity to keep the little mystery in the small package on the TV dinner trey or trade for some hidden something behind (you remember) door #1, door #2 or door #3. Those were the doors beside which stood the beautiful Carol Merrill.

Well, it’s time for you to play Let’s Make a Deal. Only you’re going to get to see behind each door…sort of.

Your choice is between two jobs. But you don’t know how each job will turn out.

Your first choice is to work in a job in which you make $98,000 as long as you are well. The American Council for Disability Awareness says a guy in his mid-30s has a 1 in 5 chance of being disabled for more than 3 months during his working lifetime. Of those 1 in 5, one third will still be disabled five years later.

So this job says if you happen to be one of those unfortunate ones who become disabled, you can still make $60,000 per year tax free.

Your other choice is to take a better paying job – $2,000 per year better. Instead of making $98,000 per year, you make $100,000 per year. So far so good.

But in this job, if you get disabled, you get nothing. Zero. Zip. Nada. Your income goes to zero.

Hey, people play the lottery every day, so I’m sure there would be some who would pick the second job. But I wouldn’t say that was the smartest move they ever made.

The 2% upside is hardly worth the risk of the 100% downside.

Yet that may be the very choice you are making. Disability is a real deal and it can be financially devastating. Just ask yourself what would happen if your paycheck suddenly stopped with no prospects of it ever starting up again.

For someone in their 30s, it might cost anywhere from 1% to 3% of their salary to pay for high quality disability insurance, if they could get it at all. It gets more expensive the later you wait to buy it. But then again, you also become more likely to need it the older you get.

Take a look at it from another angle: Same $100,000 income. I tell folks they need to save 15% per year. If you saved $15,000 per year and made 5% annually, it would take you 30 years to have $1,000,000.

What if you spent 2% on disability insurance and only saved $13,000 per year? In that case, assuming the same investment return of 5%, it would take you 32 years to have the same $1,000,000.

In reality, just a little discipline would enable you to save the $15,000 and have the disability coverage.

The cost of protection is small no matter how you look at it, either in dollars or in time.

But the cost of not being protected is so high as to be nearly impossible to calculate.

Trust me…no protection is not a good deal.

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