$300,000. That’s how much the average millennial office worker could lose without disability insurance. Those that earn more than the average 25- to 34-year-old would be even worse off. We protect our homes and our cars without a second thought, but very few young professionals I talk to have thought about protecting their biggest asset, their ability to earn an income.
The purpose of insurance is to protect the risk against a loss. You pay an insurance company a regular premium (typically every month), and when an event you’re insuring against happens, the insurance company will pay you the agreed amount. In the case of disability insurance, you are insuring your human capital. Human capital means the current lump sum value of your future income stream. If you made the average income of a 25 to 34 year old in Canada, $43,700 in 2016, you were 25, and planned to work until 65, ignoring raises and inflation, your human capital would be $1.75 million, which is a big asset. If you became disabled tomorrow and could never work again, you would lose out on $1.75 million of income over your lifetime.
Insurance companies are able to insure you in exchange for relatively low premiums because they are able to pool the risk. Everyone who pays for disability insurance coverage won’t become disabled. Insurance companies will calculate the probability of all their customers actually becoming disabled and charge appropriate premiums. If you never become disabled, your premiums will be used to pay a benefit to those who do become disabled and vice versa. Also, while disabilities can last an entire lifetime, many do not, so the chances that the insurance company will have to provide payments from age 25 to 65 are low. Therefore, your premiums don’t have to cover that full risk and therefore are lower than if you were to self-insure.
Disability insurance is important for both single individuals and those with a spouse and/or children. If anyone, including yourself, is relying on your income to cover expenses and save for the future, then disability insurance needs to be considered.
As a millennial, I don’t know anyone with $1.75 million lying around to use in case they are unable to work. According to RBC Insurance’s disability calculator 1, I have a 21% chance of becoming disabled for 90 days or longer. The average length of a disability for someone like me is 80 months, about six and a half years. My disability could be shorter than that, it could be longer, or it could be non-existent. Either way, I don’t have $300,000 lying around to cover my expenses for the next 80 months (in addition to any money I would need for retirement), and I definitely don’t have $1.75 million to replace my future income in case I become disabled for life.
Depending on your age, gender, current health, and occupation, you can have very different chances of becoming disabled. For a 30-year-old, the chance of becoming disabled ranges from 14% to 45%. While I think everyone should consider their need for disability insurance, if you’re in the 45% chance of becoming disabled, I would absolutely make sure you’re appropriately covered as soon as possible. Considering 35% of millennials don’t have any emergency fund set aside, becoming disabled for a period of time would absolutely wreak havoc on their lives.
I’ve included the RBC calculator for your reference only. I have no opinion on whether RBC bank or insurance offerings are better than others. I simply found this calculator personally useful and have not found another Canadian one that estimates your risk of disability. If you know of any other tools that estimate your risk of becoming disabled, please let me know in the comments below!
1 http://www.rbcinsurance.com/healthinsurance/disability-income-risk-calculator.html
