I speak with many prospective clients who consider self-insuring against disability (e.g. relying on savings, spousal income and/or credit). In every one of these cases, these individuals all make the following two mistakes:

• They minimize the degree of the risk (i.e. how likely it is that they will become disabled) and;
• They underestimate how financially exposed they would be if they were to become disabled.

In regard to the first point, most people consider that a permanent disability is something that will never happen to them. However, the statistics tell us otherwise.

• If you’re under age 35, chances are one in three that you will be disabled for at least six months during the course of your career.
• Men have a 43% chance of becoming seriously disabled during their working years.
• Women have a 54% chance.
• At age 42, it is four times more likely that you will become seriously disabled than that you will die during your working years.

Regarding the second point, if, at age 40, you are earning $200,000 per year and you were to become permanently disabled, the loss of income (without factoring in inflation or increased earnings) would be $4,000,000 through age 65 (the typical term of a long-term disability policy)

Self-insurance works when it comes to handling predictable, low-percentage-type risks that carry modest financial exposure. However, the risk of disability is quite unpredictable and, as you can see from the above information, it is a relatively high-percentage-type risk that carries much less-than- modest exposure.

You can choose to retain the risk (self-insure) or to transfer the risk by purchasing a long-term disability policy. When presented with these facts, most of my clients choose the latter.