Insure your income before your life

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(MoneyWatch) Many of us have bought life insurance as a means to financially protect our family in the event of our unexpected demise.

But a stark statistic from the insurance industry exposes a risk that demands equal, if not more, consideration: One in five people will become disabled between the ages of 35 and 65, resulting in the loss of their income for a period of time.

In fact, disability insurance may be more important than life insurance. Disability may deprive you of an income at the very time your medical expenses have risen considerably. Still not convinced? According to the most recent actuarial life table from Social Security, the probability of death for a 45-year-old male is just 0.34 percent. When compared to the risk of experiencing a disability, it's the smaller of the two. Insurance analysts say that one in seven people become disabled for at least five years before reaching age 65. Those are odds that most of us cannot afford to ignore.

Why, then, do more Americans have more life insurance than disability insurance (about 70 percent versus 40 percent)? Most people, I think, look at disability as something unlikely to happen to them. Death (and taxes), on the other hand, is inevitable. Insuring against disability or income loss is just another cost competing for a limited budget. It can range from $500 to $2,500 annually, varying with age and the amount of coverage.

To be clear, this insurance is not suitable for everyone. Financially independent individuals, their dependent children and retirees obviously belong in this category. Individuals with annual income below $30,000 or so may find that Medicaid, Supplemental Security Income, state disability income programs and workers compensation programs provide some form of basic income replacement in the event of disability.

But if you are the main income earner and have little or no disability benefits provided by your employer, or you are self-employed, then you are a prime candidate for a disability policy.

Maybe the AFLAC duck is on to something. More people should ask their insurance professional or advisor about protecting their income because the odds of a life-changing event are fairly high. Check back in a few days, and I'll have some tips on what exactly to look for.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.