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Protect Your Biggest Asset

What is your biggest asset? Unless you’re Kim Kardashian or earn a royalty income, your biggest and most enduring asset is probably your ability to earn an income. Most of us have insured our house, possessions, cars and our lives (even our phones!). But if you don’t have disability insurance, the most important asset you have is still unprotected. 

Key Points:

  • What Are the Chances of Actually Needing to Use Your Disability Insurance?
  • How to Get Disability Insurance
  • Some factors that influence the premium

 

Consider this: if you currently earn $50,000 a year and you’re 25 years old, from now until you’re 65 you’ll earn $2 million. That assumes your income never increases, which it almost certainly will.

Doesn’t that seem like it might be worth protecting? Is your house or car worth $2 million? Most of us don’t own any single object worth $2 million.

What Are the Chances of Actually Needing to Use Your Disability Insurance?

Disability insurance insures your ability to earn income. Many people hear the word “disability” and immediately think of an accident. But most long-term disabilities are the result of illness, such as heart disease or cancer. In New Zealand, 1.1 million people (24%) identify as having a long-term disability*.

Not only that, but 4 in10 men and 6 in 10 women will statistically be off work for 30-90 days due to accident or illness before age 65.

What about the benefit?

The government does provide benefits, but qualifying is not always easy. The benefits provided are rather limited, even for the most frugal of people.

So how about ACC?

If you’re an employee, ACC will pay you 80% of your income while you’re on claim, but they only cover accidental and road injury. Of all people who are off work long-term, only 20-25% are on ACC. There is a much higher probability of you suffering a trauma, or significant health event that leaves you unable to work. 68% of people between the ages of 30 – 70 will suffer a trauma event. These are not covered by ACC.

How to Get Disability Insurance

Large employers typically offer short-term and long-term disability insurance. This coverage is frequently affordable and will cover 50-60% of your salary. The total pay-out may also be capped.

If you prefer or need to go with an individual policy instead of through your employer, be aware that they can be quite expensive, but have far more flexibility to provide what you need. The cost of an individual policy can vary dramatically. As a ‘rough-rule-of-thumb’ but expect to annually pay 1%-3% of your salary to replace up to 75% of your salary.

Some factors that influence the premium include:

  1. The monthly pay-out. Obviously, the more money you would receive each month in the event you suffer a disability, the more your policy will cost.
  2. How “disability” is defined. Does it pay if you are unable to do your job? What if you can work part of a day, but not the whole day? Be sure you know what you’re getting, and what you’re not getting.
  3. How long is the waiting period before you start receiving your payments? The longer the waiting period, the less expensive the policy will be.
    1. This is a good reason to have that 4-6 month cash reserve you’re always hearing about. If you don’t currently have it set aside, get started today!
  4. How long does the benefit you for? Generally, the benefits will pay you for up to 2 years, 5 years or through to age 65 (and sometimes beyond). The longer the payment, the higher the price
  5. Your occupation. Some jobs are simply more hazardous than others. Everything else being equal, a construction worker should expect to pay more than an accountant.
  6. Cost of living. Some policies cover cost of living increases. This can make a big difference, depending on the length of your disability. Typically, you will see this shown as ‘indexing’ or CPI/ inflation.

 

Disability insurance is the insurance that everyone seems to forget about, especially those who are self-employed. But this may be the most important insurance you can purchase! Look into disability insurance today; your future and the future of your family may depend on it.

Dominic Bish

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