Do Young Lawyers Need Disability Insurance?
Executive Summary
Disability insurance does not sound necessary to most young lawyers. But did you know that a Social Security report states that a 20 year old has a 25% of becoming disabled before reaching 67?
Lawyers have worked so hard for the career they have, but so many are leaving the future earnings of their careers unprotected. Disability insurance won’t protect all of your future earnings, but is there a reason why you wouldn’t protect at least some of it? Disability insurance has many considerations that all young law professionals should think about. A few lawyers might not need disability insurance but every lawyer should at least know enough to make that decision.
Are you earning a high income as a lawyer?
Do you expect your future income to be even higher than your current income?=
Would a disability that impairs your ability to work for a year or more affect your personal and professional life?
If you answered “yes” to these questions, you are a young lawyer who should consider disability insurance.
Disability insurance may sound unnecessary like the travel insurance offered when buying a flight, but disability insurance is different. It protects something quite valuable to a young law professionals: future earnings.
As a young lawyer, you are likely building up your net worth now. You have a high income that pays for your current lifestyle, and you can expect that income to continue to increase as you gain more experience.
Now consider what would happen if you become disabled and unable to work as a lawyer for a year or longer. Could you continue to afford your current lifestyle? Could you even afford to make your necessary payments like your rent or a mortgage? Would this gap in working as a lawyer affect your future earning potential?
A disability can be any impairment that causes you to miss work for an extended period. Sometimes it is only for a few months or a few years. Other times it is for the rest of your life.
Disabilities can arise from accidents or illnesses. We do not know if we will become disabled nor do we know how long a possible disability will last. But we do know that a disability can impair us from working for a long time, force us to sell assets to fund any disability expenses, and limit our future life outcomes.
Even if you believe the chance of becoming disabled is low, the financial consequences of a disability may be too great to ignore. Disability insurance is not for everyone, but every lawyer should consider it as a part of their financial plan.
What does insurance do?
Legally it is defined as a contract in which one party agrees to indemnify another against a predefined category of risks in exchange for a premium. In simpler terms, insurance allows you to transfer the risk of financial loss to another party for a fee. If one of the insured risks causes monetary damage to you, the insurance company will pay you an agreed-upon amount.
Insurance policies are specific about the types of risks that they cover. That is because we face many different kinds of risks every day. It would be impossible to insure against every risk at an affordable price.
Instead, we need to think about risk in terms of its likelihood and its magnitude. It is more likely that you will stub your toe than get into a car accident. So why do we have car insurance but not toe insurance?
The answer is that a car accident can cause thousands of dollars of damage both to property and to people. A stubbed toe is just painful for a few minutes.
Insurable risks are unlikely to happen but will cost a lot of money if they do happen.
The most common types of insurance are auto, home, renter’s, medical, and life insurance. Each type of insurance policy covers unlikely risks that can result in large financial costs. It is unlikely that your house will flood, but if it does flood and you don’t have insurance coverage, you may not have the money to repair your home and your damaged possessions.
If you pay for medical insurance, your insurance will pay for expensive procedures and medicines that you may not be able to afford at the time. While this insurance covers your medical expenses, it doesn’t cover the living expenses that you still have to pay in the meantime. So how do you plan to continue to pay for your living expenses if you are unable to work after an illness?
What does disability insurance cover?
Disability insurance covers all or a portion of your future earnings if you cannot work due to a disability. A 30-year-old lawyer working for a big law firm will make a substantial annual income. In addition to a high income, lawyers can expect their income to increase as they gain experience. Can a lawyer risk not insuring at least some portion of those potentially millions of dollars of future income?
What if this lawyer also has monthly costs to pay? Mortgages, rent, bills, and student loans are still due even if you are disabled and unable to work.
As expenses rise, the need for disability insurance rises too.
An emergency fund may cover a few months of being unable to work, but its purpose is to fund short-term emergencies. Disabilities can last years or even a whole lifetime.
Disabilities are more common than you think!
According to the Social Security Administration, a 20-year-old person has a 25% chance of becoming disabled before they reach 67 years old. Disabled means an inability to engage in any substantial gainful activity as a result of medically determinable physical or mental impairments that can be expected to result in death or to last for a continuous period of not less than 12 months. Special rules apply for workers at ages 55 and over whose disability is based on blindness. The law generally requires that a person be disabled continuously for 5 months before he or she can qualify for a disabled-worker benefit.
25%!!!!
Note that this definition of disability is more stringent than the definition of private disability policies. Meaning it may be even more likely than a 25% chance for a lawyer to have a qualifying disability.
Curious what qualifies as a disability? Here is the list of disabilities on the Social Security Administration’s website.
If you have a 25% chance in your lifetime of being unable to work for a minimum of 5 months but likely more than 12 months, would you want to insure against that risk?
After all, a 25% chance of missing over a year of your salary payments can affect your future earning potential and your future net worth amount, especially if you have to sell assets to fund your living expenses while disabled.
Should Young Lawyers Consider Disability Insurance?
Young lawyers should consider adding disability insurance to their current insurance coverages because professionally lawyers can benefit from disability insurance more than other professionals.
Lawyers develop skills and knowledge unique to their specialty, accumulate debt throughout their careers including both student loans and personal loans, and have a high earning potential compared to most professions. Disability insurance is best suited for professionals with these three characteristics.
First, the skills and knowledge developed at law firms and law school are highly valued in the economy. While you can perform many other jobs, other people cannot perform your job. If a disability impaired you from working as a lawyer, it may not be possible to find a non-law position that pays as much. Disability insurance protects the value of your skills and knowledge so that you can still be compensated even if a disability impairs your ability to use them.
Second, student loans and private loans like a mortgage or car loan will likely need to be paid even in the case of a disability. It is rare for student loans to be forgiven if someone has a disability, even if the disabled person has to declare bankruptcy. So disability insurance protects a lawyer’s net worth by providing enough income to cover fixed expenses while disabled.
Finally, working as a lawyer is one of the highest-paying professions. Do you think it is reasonable to protect at least some portion of these future earnings?
Things to know about disability insurance
Long-term vs. short-term disability insurance
There are two types of disability insurance based on the length of the benefit period: long-term & short-term. The benefit period is how long the insurance policy will provide disability payments to the insured experiencing a disability.
Short-term disability insurance usually pays benefits for less than one year, although the typical benefit period is only 3-6 months. Typically, short-term disability policies are available through employer benefit plans. You should strongly consider taking advantage of a short-term disability plan if your employer offers it.
Long-term disability is for benefit periods of a year or longer. Benefit periods can range from 1, 2, 5, and 10-year terms or up to age 65, 67, or 70. The general rule of thumb is that the longer the benefit period, the higher the monthly premium.
Elimination period
When someone is impaired by a disability, disability insurance does not pay out immediately. Instead, disability insurance policies contain an elimination period. This is the amount of time that an insured must be disabled before receiving an insurance payout.
For short-term disability, this is typically 14 days. So a lawyer would have to be disabled for more than two weeks before receiving any disability insurance payments.
For long-term disability insurance, the elimination period can differ. It can be as short as 30 days or longer than one year. The general rule of thumb is that the longer the elimination period, the lower the monthly premium.
Any Occupation vs. Own Occupation
When choosing a disability insurance policy, you will need to decide whether to insure against the disability of your own occupation or any occupation.
Own occupation means that a disability impairs someone from working in their field or specialty. Take for example a lawyer who specializes in making oral arguments. If they develop a disability that impairs their speaking ability, they may be eligible for a payout. Another example could be a lawyer whose vision becomes disabled by an accident or a disease. That lawyer may not be able to review documents or write memos, which would make it difficult to do their job.
Any occupation means a disability impairs someone from any kind of work that they are capable of performing based on education, training, and/or experience. If you have an any-occupation policy, you can be disabled from working your job at the law firm yet still not receive an insurance payout because you could work a simple low paying job at the nearby store.
Since it is more likely that a disability would impair you from performing your own occupation and not any occupation, an own occupation policy is generally more expensive. As a lawyer whose future earnings are much higher than many other occupations, an own occupation policy may be a better choice.
Disability Insurance Considerations
Lining up coverage and elimination periods
As mentioned above, choosing your elimination period and benefit period will affect the monthly premiums.
To prepare yourself for a disability, you should have an emergency fund of 3-6 months of savings to cover your regular monthly expenses. The emergency fund allows you to self-fund your disability for a few months while filing a claim with your disability insurance provider. Having money to cover your expenses while filing a claim is critical, even if you have a short-term disability. Insurance companies may take longer than the elimination period before issuing checks to you.
Ideally, the emergency fund has more than enough money to cover the elimination period of a long-term disability policy. If there is a short-term disability policy and an emergency fund, the money will hopefully cover all expenses until the long-term policy begins to issue checks.
It can be a smart decision to choose a long-term disability policy elimination period that is shorter than the time an emergency fund and short-term disability policy will cover you. This strategy allows payments to continue to arrive without a period of interrupted payments. It is possible for the first insurance payment from a long-term disability policy to not arrive until 30 days after the elimination period has been met.
Student loans and other long-term loans
If you have student loans or other long-term debt like a mortgage, you have fixed expenses that you must pay even if you are not working. A disability policy that covers the repayment period of any debt owed may offer a significant decrease in the risk of defaulting on payments.
If you are paying back your student loans over ten years, consider disability insurance that provides enough income to cover the repayment costs along with living expenses for a ten-year benefit period.
If you are the primary income earner for a family, have a mortgage, and you are trying to save for your kids’ college funds, consider a long-term disability policy that covers you until age 65-70. This longer benefit period allows you to protect some portion of your income until you and your family are less dependent on your income.
Coverage amounts
Disability insurance protects your income, but it’s uncommon to protect 100% of your income for greater than one year with disability insurance.
Short-term disability insurance may cover 100% of your income for a few months. If you have short-term disability insurance through an employer, take a moment to read about the benefit period and the elimination period of the policy.
Long-term disability insurance typically covers 40-60% of your income. This partially protected income can be problematic for people whose expenses exceed 60% of their income. While you may not spend the same amount of money on entertainment if you are disabled, you may have other expenses that arise from the disability. Do not assume your expenses will decrease due to a disability. If you have high monthly expenses compared to your income, increasing the protected percentage of income may be worth the additional cost.
Why you might not need disability insurance?
Paying for a private disability insurance policy is not for everyone. While you should consider disability insurance, there will be lawyers who do not need it.
If your employer offers adequate short-term and long-term disability insurance, additional disability insurance may not be necessary.
Like all insurance products, disability insurance costs money for protection. Your age, occupation, where you live, annual income, and other factors all affect the monthly premium price. Policy choices like elimination period, benefit period, and any occupation vs. own occupation will also affect your monthly premium.
In general, a disability insurance policy will cost between 1-4% of your annual income. Consider the current costs and future benefits when making your disability insurance decision. 4% may cost more of your income than you are willing to pay. On the other hand, 1% of your income may not adequately cover your future needs in the case of a disability.
Another reason why you might not need disability insurance is if you have enough money saved to comfortably live the rest of your life. In this case, the loss of future income would not substantially affect the ability to afford your future lifestyle.
Conclusion
Finally, “I won’t get disabled” is not a good reason to avoid considering disability insurance. As stated above, disability is more common than most people think. Do you feel comfortable taking a 1-in-4 chance of losing at least a year of income due to a disability?
Not protecting your current income also causes financial problems later in life. Nearly 78% of people who filed for bankruptcy from 2013-2016 cited loss of income as a contributing factor to bankruptcy. It makes it difficult to achieve a comfortable financial future if you have to declare bankruptcy at some point in your life.
Income loss due to a disability may not be likely (even though it is more likely than people assume), but its impact on your financial future can be substantial. Disability insurance is one tool to protect yourself from the loss of future income.
The Developing Financial Process analyzes your current financial situation and your future earning potential to determine if disability insurance is right for you. Developing Financial does not receive commissions or kickbacks if you do purchase a disability insurance policy. The Developing Financial Process fee model reduces conflicts of interest when recommending insurance products, so you can be assured that the recommendation is for what you need, and not what makes money.
Schedule a Meet & Confer meeting now to see how including disability insurance can protect your future earning potential.
Disclaimer: Nothing in this blog should be considered financial advice or recommendations. Your questions are unique to you and your own personal financial circumstances. You should consult with a financial professional before making a financial decision. See full blog disclaimer.