14: Life & Disability Insurance

There’s a saying in finance that “insurance is sold, not bought”. And people who sell insurance as if every single problem known to humankind is actually an opportunity to buy an insurance policy are the reason that saying exists. 

We had a yard sale when we first moved to our community, and the first person who asked me with a smile what I did for a living heard me say “financial planner”, stopped smiling, took two steps back, and said “we already have insurance”. I never had an opportunity to correct his misunderstanding, because I literally never saw him again. 

Nobody wants to talk about insurance, at least, not with the people who sell it hard, and man - I get it. But if you depend on your ability to work to pay the bills, or if other people depend on you for their food and shelter, you have to at least think about it. 

Today, we’re taking five minutes to think about life and disability insurance that you own yourself, as opposed to the group policy you might be part of through work). 

Why is this important? 

At their most basic, life and disability insurance are legal contracts that you enter into with an insurance company. You pay a monthly or annual premium, calculated by the company based on how likely it is that the thing you’re insuring yourself against actually happens. In turn, the company promises (with many conditions) to pay you a certain amount of money if it does. 

The deeply unfair truth is that the people who can easily afford life and disability insurance need it less than the people who can’t, and the people whose health is already fragile and are much more likely to need protection are the least likely to be able to get it. 

Because, in case you weren’t already aware, life and disability insurance policies must be profitable or insurance companies won’t sell them. The higher the likelihood that you’ll need to make a claim, the more you’ll pay…if you’re approved at all. 

Disability Insurance

In the case of disability insurance, what you’re protecting is your ability to keep food on the table and a roof overhead even if you’re too sick or injured to earn income. Your premium is based on what you do to earn a living, your gender, health and medical history, age, how long you’re willing to wait before you start getting money from the policy, and how much money you want each month. 

Disability insurance policies can include extra benefits (for an extra cost), like:

Own Occupation which pays your disability benefit even if you can work in a different profession, just as long as you can’t work in your chosen one

Future Increase Option which guarantees you can increase the amount of your disability benefit in the future if your income (and need to protect it) increase, without having to prove you’re healthy enough to qualify

Cost of Living which increases your benefit amount once a year according to a formula, usually tied to the consumer price index or a set percentage of your benefit

Return of Premium which pays back the premiums you’ve paid if you don’t use the policy, either by a certain age, after a certain length of time, or when the policy expires

If you don’t understand your insurance policy and exactly what it entitles you to and when, call the person who sold it to you. If you can’t get a hold of them, call the insurance company itself. Both sets of numbers are listed on the policy itself (that huge ream of paper you got in the mail when you first bought it), or on annual statements, if you get them. If you have neither, look up the company online. Ask questions until you understand what you’re paying for. 

Life Insurance

With life insurance, you’re not protecting yourself. Instead, you’re protecting the people who depend on your income. The goal is to leave behind enough money to replace your income, or at least buy enough time for your kids to grow up or your partner to figure out how to live without you. Your premium is based on your age, gender, health (and medical history), and how much money you want your people to have if you die. 

Life insurance comes in many different flavours, including: 

Term insurance which lasts for a specified number of years before it renews or ends. Term insurance is cheaper when you’re younger and gets more expensive with each successive renewal. 

Permanent insurance which lasts your whole life. Permanent insurance is more expensive than term insurance when you’re younger, but doesn’t get any more expensive as you age. 

Universal insurance which is a permanent policy that includes an investment component

The same rules apply if you don’t understand your life insurance policy: call the person who sold it to you, and if they can’t (or won’t) help, call the insurance company you send your premiums to. Stay on the phone until you understand.

If you have no bills or a big enough pile of money that you don’t need to work, disability and death are certainly catastrophic, but not financially so. 

If your income is necessary to keep food on the table and a roof overhead, losing it is a financial catastrophe, and finding out what kind of protection you already have, or equipping yourself to find out what kind of protection you can get, is a good use of your time.