If you could no longer work starting today, what assets, specifically, would pay for your living and other obligations?
One in six Canadians will be disabled for at least 90 days before age 50 and a very large share of those never go back to work. Why do people not deal with that? Because, people are not intuitive about events based on probabilities.
They will buy lottery tickets and expect to win at odds of 20 million to one against. They will over-eat and under-exercise when the odds of these leading to a bad thing is one in three.
You can think about this kind of problem effectively, but not intuitively.
You should view insurance solutions based upon two parameters. How likely is the loss (high to low) and how expensive / affordable (high to low) is the loss. There are four quadrants.
High cost / high probability situations are uninsurable. People cannot get life insurance after they are diagnosed with pancreatic cancer.
People ignore low probability / low cost. Left my gloves in the restaurant. Broke a rented DVD.
The other two sectors are more interesting.
People sometimes foolishly insure high probability / low cost. Think dental insurance or the chiropractor / massage part of health insurance. These have low maximum benefits. Once you pass the deductible, you, or someone else, are paying the cost of the service plus the insurer’s overhead. Send them ten dimes and get back three quarters. You are “insuring” things that are affordable, albeit a little inconvenient. If you cannot afford the costs that might occur then, for you, it is truly insurance, otherwise not. If the employer pays, it takes up space in their total compensation package, so less pay for you.
True insurance is in the form big loss / small probability. You die prematurely. Your house burns down. You become permanently disabled. You need biologic drugs. Despite the high cost of an incident, the premium is low because it is unlikely.
Sometimes people do not understand that they should pay the premium solely because they cannot afford the loss. What specific assets will you use to pay if there is no coverage?
The most common oversight relates to disability insurance.
The ability to earn is worth more than any other asset the average person owns. At least fives times more than their home. If they had a multi-million dollar Picasso, they would not leave the gallery until it was insured for full value and against all perils.
Their similarly valued potential earnings often go uncovered, and almost always are under-covered. Will other financial assets kick in? Maybe not for HENRY.
HENRY is an acronym. High Earnings Not Rich Yet. If you are HENRY, you would be financially disabled as well as physically disabled if the unexpected occurs. One disability at a time is too many for most people. Remove the financial disability now. Use insurance. The price is lower than you think. Discover that for yourself.
There is a rule. “It is harder to live without your income than it is to live within it, and living within your income is hard enough.”
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.