A friend received a Disability Insurance quotation to insure her loss of income if she suddenly became unable to work as a result of ill-health. The compensation on loss of income is 60% of her usual monthly income of $4,500 until her retirement age of 65 (9 years to go). The minimum cost of insurance is $389.45 per month or $4,673.40 per year. Was this worth it?
My immediate response was “of course! Unless you have other means of income to substantiate your expenses should you become unable to work.”
We started to look at different simplified scenarios. Let’s say she makes a claim against her disability insurance after the 6th year. That means she still has 3 more years to go before reaching her retirement age of 65. So 60% of her current monthly income equals to $2,700 per month and for the next 3 years, she will be receiving $97,200 from her disability insurance policy.
Let’s consider the cost of insurance she has paid in the 6 years prior. An annual cost of $4,673.40 x 6 years = $28,040.40. The disability insurance payout is $97,200. This means she is still financially better off by 3.47 times of what she paid.
So people may argue that if she never has to make a disability claim, she would have wasted $42,060.60. Fair enough but one must remember having insurance provides that extra layer of financial security. Also it is important to note that insurance is primarily a protection against sudden financial losses, NOT an investment. I have spoken at a few events and made comparisons on the financial outcomes on families having insurance protection and no insurance protection. It either provides sufficient financial comfort or generates devastation after loss.
