You buy insurance for you car, your house, your health and even your life. But what about your income? Income protection is important for anyone who depends on an income – and that’s the vast majority of working adults.
Medical Insurance Pays for Care – But It Leaves Many Gaps
Many different conditions can lead to disability: cancer, heart disease, stroke, depression, injuries, severe back conditions… The list goes on and on.
Plus, many of these disabling conditions are common. The Social Security Administration says that one in four Americans will become disabled before reaching retirement age. Unfortunately, many people don’t make plans for this possibility.
Think about what happens when people get sick. If they have health insurance, their coverage will help pay for their doctor’s appointments, medical tests, and prescription drugs. However, health insurance won’t pay for everything. Many people have significant out-of-pocket costs and out-of-network fees. When you’re dealing with a critical illness, these medical expenses can eat through your savings fast.
At the same time, a person experiencing a major health crisis may not be able to work. Between receiving treatment and dealing with the condition itself, it might not be possible to continue working. Sick pay often only covers a few days and medical insurance doesn’t help pay for lost income. However, income protection is available.
Income Disruption Can Be Disastrous
When people are living paycheck to paycheck or when they have a limited amount of savings, any income disruption can be disastrous.
According to the Lending Club, 66 percent of Americans are living paycheck to paycheck as of June 2022. Even among high income earners, it’s common to live paycheck to paycheck. For example, 52 percent of people earning between $100,000 and $150,000 say that they live paycheck to paycheck. Some people have savings, but the average savings amount is only $10,757.
Obviously, people who are living paycheck to paycheck can’t afford any disruptions to their income. Having 10 grand in the bank may help them feel more secure. Certainly, this amount could get someone through a variety of difficult situations – for example, an unexpected car breakdown or layoff. However, in the case of a long-term disability, most people would blow through this amount fast.
What About Workers’ Compensation?
In most states, the majority of employers are required to provide workers’ compensation insurance. This means if you are injured on the job, you should be able to apply for workers’ compensation benefits.
However, there are a few caveats.
Firstly, some people don’t have access to workers’ compensation. For example, if you’re self-employed, you probably don’t have coverage.
Secondly, workers’ compensation only applies to work-related illnesses or injuries. What if you’re injured in a car crash? What if you hurt yourself on a skiing trip? What if you develop cancer, heart disease, or another chronic condition that has nothing to do with your job?
Many illnesses and injuries are unrelated to work, meaning workers’ compensation won’t provide coverage. You need income protection in the form of private disability insurance.
Don’t Take Your Income for Granted
If you’re healthy now, you may have a difficult time imagining this could change. Most people don’t want to think about things like disability. That’s understandable, but the reality is that disability can happen to anyone. It’s important to plan for the possibility of an illness or injury that prevents you from working.
Think about how long you could continue to make ends meet if you had to stop working.
· What would happen after three months with no income? Would you have any savings left?
· What would happen after six months? Would you be able to pay your bills?
· And after a year? Would you be able to make mortgage or rent payments to keep your home?
A person’s income is the basis of his or her financial security. Given this, it makes sense to protect that income. People often overlook paycheck protection, but it should be a key part of financial planning.
What Is Income Protection?
Income protection is also called paycheck protection or disability insurance. It’s insurance coverage that replaces a portion of the policyholder’s regular income if the policyholder is unable to work due to a qualifying disability.
Disability insurance monthly benefits can help people cover expenses and keep their heads above water while they’re dealing with a physical health or mental health issue that prevents them from working. Policyholders can use the money however they see fit – for example, to pay mortgage bills or monthly rent, buy groceries and other basic necessities, or pay utilities and other bills that don’t stop just because a person is unable to work due to a serious illness or injury.