Two Strategies. One Outcome

Earning money - making a living - it's what we do. But think about this: we protect our other assets (our home, our car, our life), and yet we don’t consider the importance of our paycheck in the event of a disability. Mind-blowing. It is estimated that almost one of every seven people will be disabled for at least five years before the standard retirement age of 65. It is also estimated that more people lose their homes each year because of the wage earner's disability than because of his or her death.

Fortunately, there are two strategies to protect your income should you become disabled. You can either earmark existing assets to be used as a substitute for a paycheck, otherwise known as "self-insuring." Or you can transfer your risk to an insurance company by purchasing disability income insurance.

Earmark Existing Assets

If you have adequate resources, you may be in a position to “self-insure.” Self-insurance typically involves setting aside (or "earmarking") a portion of your existing assets to be used as a substitute for your paycheck should you ever become disabled. The amount that you earmark will vary depending on numerous factors, including your risk, your income and expenses, and the other benefits you would receive in the event of disability. You might choose certain assets to be used for this purpose, set aside a lump sum, or set up an accumulation or savings plan.

Transfer Risk to Insurance Company

If you can’t self-insure (which is the case for most of us these days), you can transfer the risk to an insurance company. Although you can never completely eliminate risk, purchasing a disability income insurance policy shifts the risk of loss of income to the insurance company. Because it is a large institution, the insurance company is in a much better position to shoulder this risk than you are as an individual. This is because the insurance company pools the risks of many individuals, the majority of whom will probably never become disabled.

Either way, through self-insuring or transferring the risk to an insurance company, it is extremely important to seriously consider what would happen if you could not work due to an accident or injury. How would you survive financially?

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