Can You Delete Life Insurance From The Budget?
How about disability insurance?
Note: We are moving through the final chapter of Economics-Based Financial Planning, and the subject is insurance as a financing solution to common household risks. Today is a big one: the risk of loss to human capital (HC).
HC is the most significant asset for most young and middle-aged individuals. A tragic accident or illness could result in losing human capital, and the premature death of the primary income earner in a household would be a devastating loss to those who depend on their income. While the untimely death of a young person presents itself as a heartfelt headline, a disability is much more likely than death during much of life. According to the 2023 actuarial notes of the Social Security Administration, a 20-year-old has about a 25% chance of becoming disabled before normal retirement age.1 This estimate is based on the following definition of disability:
A disability is the “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.”
Any substantial gainful activity for not less than 12 months is a severe definition of disability. Still, the box is checked 25% of the time before the normal retirement age, assumed to be age 67. By comparison, a 20-year-old faces only a 13% chance of death before the normal retirement age. Odds differ between disability and premature death, but the economic risk is on the severity side. Death is the evaporation of human capital and a disability, while more frequent is less severe. Return to work is probable.
Should Life Insurance and Disability Insurance be Purchased?
Is this a risk for which you should be concerned? The answer is knowing who depends on your human capital.
Is it just you? Then premature death isn’t consequential, and life insurance isn’t needed. Disability risk is different. If you are disabled, bills still need to be paid. Food, shelter, and clothing need to be funded, and if earned income isn’t available due to a disability, a replacement is required. That may be a reserve fund, short-term and long-term employer disability insurance, private disability insurance, or Social Security Disability Insurance (SSDI).
Two-income households and households with children will have their living standards dependent upon the human capital of all household income producers. Fortunately, any change in living standards due to premature death or an extended disability is measurable. Here is a prior post on the topic open to all subscribers.
Today: If you own or are considering life insurance, you will want to read about how to measure the quantity of life insurance needed. The answer could be $0. The installment takes the reader through a learning presentation of human capital risk and typical life insurance product solutions. It ends with a discussion of disability insurance and three policy provisions to know before buying disability insurance.
Excerpt:
