Disability Insurance

Disability Insurance (also known as 'income protection insurance') is a type of insurance that provides you with a replacement for a portion of your income if you become unable to work due to a qualifying illness or injury. Think of it as insurance for your paycheck. While most people readily insure their homes and cars, many overlook their single most valuable financial Asset: their ability to earn a living for decades to come. This future earning power is the engine that fuels all other financial goals, from buying a home to saving for retirement and, crucially, building an investment portfolio. Disability insurance acts as a critical backstop, ensuring that a sudden health crisis doesn't derail your entire financial plan. It provides a steady stream of cash flow to cover living expenses, preventing you from having to dip into your long-term savings or, even worse, sell your investments at an inopportune time. For any serious investor, protecting the source of their capital is the first and most fundamental step in Risk Management.

From a value investing perspective, building wealth is like constructing a great building. You wouldn't build a skyscraper on a foundation of sand. Your consistent, earned income is that solid, bedrock foundation. Before you can think about picking great companies or analyzing balance sheets, you must first protect that foundation. A long-term disability is one of the most devastating financial events that can happen to a family, often more financially catastrophic than a premature death. Without a steady income, everything stops.

• You can't contribute to your investment accounts.
• You may be forced to liquidate your existing portfolio to pay for daily life, often at fire-sale prices.
• You lose the power of compounding, as your investment timeline is brutally interrupted.

Paying a monthly Premium for disability insurance isn't an expense; it's an investment in ensuring your financial house can withstand a storm. It’s a defensive strategy that enables your offensive investment plays to succeed over the long run.

Understanding the main types of policies is key to choosing the right protection.

• Short-Term Disability (STD): This coverage is often provided by employers and is designed to cover temporary periods of disability, typically lasting from a few weeks to six months, and sometimes up to a year. It's meant to bridge the gap until you either return to work or your long-term benefits kick in.
• Long-Term Disability (LTD): This is the heavyweight champion of income protection. LTD policies start paying out after a waiting period (called the elimination period) and can provide benefits for many years, often until you reach retirement age (e.g., 65 or 67). This is the essential coverage for protecting against career-ending disabilities.

This is arguably the most important feature of any policy.

• Own-Occupation: This is the gold standard. A true “own-occupation” policy defines disability as the inability to perform the material and substantial duties of your specific occupation. For example, if a surgeon injures their hands and can no longer operate, this policy would pay benefits, even if they could earn an income as a medical school professor.
• Any-Occupation: This definition is much stricter and less favorable to you. It defines disability as the inability to perform any occupation for which you are reasonably suited by education, training, or experience. Using the same example, the insurance company could deny the surgeon's claim, arguing that they are still perfectly capable of working as a professor. Always push for an “own-occupation” definition if possible.

• Group Policies: These are typically offered by an employer as part of a benefits package.
  1. Pros: Often inexpensive or free, with easy enrollment (no medical exam).
  2. Cons: The coverage is often basic, the definition of disability may be weaker (“any-occupation”), benefits might be taxed (if the employer pays the premium), and the policy is not portable—you lose it if you leave your job.
• Individual Policies: These are policies you purchase yourself from an insurance agent or broker.
  1. Pros: Highly customizable, portable (it stays with you regardless of your employer), benefits are typically tax-free (since you pay premiums with after-tax dollars), and you can secure a strong “own-occupation” definition.
  2. Cons: More expensive and requires medical underwriting (a review of your health history).

When shopping for an individual long-term disability policy, pay close attention to these details:

• Definition of Disability: As mentioned, insist on a true “own-occupation” definition.
• Benefit Period: This is how long the policy will pay out. For robust protection, you want a benefit period that extends to at least age 65.
• Elimination Period: This is the waiting period between the date you become disabled and the date your benefits begin. Common periods are 90, 180, or 365 days. A longer elimination period will result in a lower premium. You can align this with your personal emergency fund.
• Riders: These are optional add-ons that enhance your policy. Common ones include:
  1. Cost-of-Living Adjustment (COLA Rider): Increases your benefit each year to keep pace with Inflation. This is crucial for a long-term claim.
  2. Future Increase Option (FIO): Allows you to purchase additional coverage in the future as your income grows, without having to go through medical underwriting again.