Is that your final answer?

When asked, “What’s your most important financial asset?” how would you answer?  Some of the more common responses are, “my house, my car, my retirement account” or any combination of physical “things” we identify with that have significant (relatively speaking) value.

At least initially, very few people would answer the question with these words – “My cash flow.”  As abstract as it might appear, cash flow – for most people – is the most important financial asset we have. This begs us to explore how cash flow generates potential for risk.

Generally, there are four circumstances that can negatively affect your cash flow:

1. Retirement – Loss of a regular paycheck
   
2. Loss of job
   
3. Disability – creating the inability for you to work as you did previously
   
4. Death
   

While we typically protect the assets that we perceive to be the most important to us (homeowners insurance, auto insurance, etc.), the one that is actually the most valuable typically goes without too much concern from an insurance point of view. There are several ways to protect your assets.  The first step is to understand how each product works to assist in your strategy. While life insurance protects your estate and other assets and pays expenses at the time of death, there are other ways to consider protecting your income, especially while you’re still living!

A disability insurance policy is designed to protect your cash flow. For those earning a decent salary/income, or for a person who possesses a unique skillset without which he would see a significant decline in income (e.g. surgeon, attorney, etc.), a disability policy is paramount.

When analyzing cash flow, especially when you are younger, a life changing disability can not only change your quality of life physically, it can put you on a financial vector far off course from your original plans and dreams. Many employers include a standard disability income policy for their employees (if not, they should) – that is one step in the right direction. However, most employer-sponsored policies limit benefits to a maximum of 60 percent of the current earnings up to a maximum dollar amount.  And, unless the premiums are paid with after-tax dollars by the employee, those benefits are taxed when received. Therefore, the actual cash received will be much lower than 60 percent of your current earnings.

To soften the blow, there are supplemental disability products available. Typically secured by higher paid professionals, a supplemental policy can help bridge the gap between what the standard policy payout delivers and getting you closer to what you currently earn. Most disability products will fall short of 100 percent of your salary, as there needs to be the incentive to become well again and get back to work. Most high-quality disability carriers possess a professional staff to assist you in coordinating care for back-to-work purposes.

Just for reference, following is a list of some of the top causes for a disability:

1. Cancer
   
2. Back problems
   
3. Injuries (most often, outside of work)
   
4. Behavioral health
   
5. Circulatory disorders
   

As you can see in the list, you likely have experienced or know of at least one person suffering from one of these conditions at any time in your/their lives. And, as you’ve seen in a previous Slice, the odds of a person becoming disabled and needing coverage are approximately 1 out of 3.  Following are some more facts regarding the risk of a disability:

• The Social Security Administration estimates that slightly more than 25 percent of 20 year olds will be disabled before age 67
  
• Only 31 percent of Americans are protected by Disability Insurance –
  
  • Half of those believe they need more coverage
    
• Only 9 percent of long-term disabilities are the results of accidents considered “serious”
  
• 65 percent of applicants for government benefits are turned down
  
• 90 percent of disabilities are non-work related; therefore they are not covered by workers compensation
  

Now that you have a bit more perspective, while you’re reviewing your homeowners and auto coverage, perhaps it’s time to analyze the coverage for your most important financial asset – your paycheck! Luckily, there are several solutions and the younger you are, the lower the cost.