Any good financial planner will tell you that the role of disability income insurance is a key asset and makes up part of a solid foundation for any financial plan.
The "Portfolio Pyramid"
A common way of explaining and illustrating a solid financial plan is to imagine a pyramid. The most important components are at the base, and are the foundation upon which the entire structure rests. In every case, the base is going to emphasize the defensive, protective aspects of your financial plan:
Base: Protective Assets
- Disability insurance
- Life insurance
- Long term care insurance
- Unemployment insurance (for employees) or emergency savings (for independents, the self-employed and business owners)
- Liability insurance
- Home and car (property and casualty insurance)
Most planners (me, included) would advise people to make sure these are in order and fully-resourced before you start moving up the pyramid.
Middle: Foundational Assets
Moving midway up the pyramid you might find assets like these:
- Home ownership
- Education savings
- IRAs and 401(k)s
- Annuities
Top: Supplemental Assets
- Closely-held business
- Investment properties*
- More speculative or risky investments
- Gold/precious metals*Lots of planners who like real estate might put real estate assets further towards the foundation.
Why is the base of the pyramid important?
Because if something goes wrong, everything else in your pyramid is at risk. Consider:
- If you are sick or ill and can’t work, and you don’t have disability insurance, you can’t fund your 401(k), you can’t fund your education savings program, and you can’t fund more aggressive investments.
- If you die prematurely, and don’t have life insurance, you won’t be funding much of anything else for your family.
- If you become disabled and require long-term nursing home or custodial care, and you don’t own long-term care insurance, at a cost as high as $100,000 per year, you will likely have to liquidate almost everything you own before you qualify for Medicaid assistance.
- If you become disabled, you may have trouble continuing to pay your life insurance and other insurance premiums. This means all your other financial goals in life are exposed to even more risk.
Insurance should be a part of your line of defence
For younger professionals, below the age of about 45-50, the most frequently encountered of these three financial disasters is disability. Especially for doctors, who must remain relatively active and mobile during the course of their work seeing and treating patients. In some specialties, you have to be able to remain on your feet for many hours in surgery or in crisis ER situations.
About 1 in 7 individuals will require long-term care at some point in their life. Yes, everyone dies, but deaths during or before peak earning years are still fortunately relatively uncommon compared to long-term care or disability.
Your chances of becoming disabled at some point during what should be a long and rewarding medical career? 1 in 4.
Disability insurance, then, helps protect everything else in your pyramid. Without a plan to continue your financial life even if you cannot continue to work in your current profession, everything else you’ve been planning on – your hopes and dreams and your family’s financial security – can collapse overnight like a house of cards.
Disability insurance replaces a substantial portion of your income – usually up to about 60 percent – if you become disabled and unable to work. For doctors and future doctors, it’s usually important to get a policy that covers any disability that makes you unable to work as a physician, particularly, as opposed to a policy that only covers you if you are unable to work in any profession.
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