- Single parent, age 27, earning $84,000 per year
- 2 children, ages 3 & 6
- Monthly living expenses = $6,000
- Current savings = $20,000
- Appraised Value: $350,000
- Loan Balance: $315,000
Reasons For Coverage Now:
- Peace of mind—Knowing that your family will not have to suffer financially from a loss of income caused by a disability that prevents you from performing your job and losing your income.
- Limited savings—Without significant savings, the family’s living expenses would not be covered for an extended period of time, causing hardship.
- Sole wage earner in the household— The non-disabled spouse might be able to seek employment, but it is likely to take some time before employment actually begins, and the salary might not be sufficient to cover the family’s living expenses.
- Income replacement— Proceeds from a disability insurance policy can replace all or a portion of the wage-earner’s income lost due to disability.
- Lock in a low premium and future insurability at a young age— Premiums for disability insurance will never be more affordable that they are today. Purchasing early guarantees that future events will not keep you from qualifying for coverage.
Reasons To Consider Coverage:
- Complement to existing disability benefit plans— There are various public and private disability plans for which you might qualify, but they may not be sufficient to cover your financial exposure due to a disability.
Not Currently Applicable To The Scenario:
- All of the common reasons for having disability insurance are worthy of consideration.
Overview: Even though the likelihood of this young parent’s becoming disabled is not very great, the outcome could be devastating to the family if it did happen. The savings of $20,000 would not cover monthly expenses for long, particularly given that the family’s monthly living expenses would likely increase due to a number of factors, most notably additional child care costs. The family’s current living expenses of $6,000 per month could quickly increase to $8,000 or more. A reasonable emergency fund would be 6 months’ worth of monthly living expenses, or $48,000 in this case, $28,000 more than is currently available. Hopefully, this individual would have access to disability coverage through his/her employer. If that were the case, knowing the details of the coverage provided would help determine if any additional coverage was needed. While there is a bit of equity in the home, these funds would not likely be available for use in an emergency since the loan-to-value ratio (loan amount divided by market value) is 90%, generally considered too high for most lenders’ consideration.