When I ask people what their most valuable asset is, I am always surprised by the variety of responses I get. Some people tell me it is their car, house or even their jewelry. After reviewing their situation, I usually find that their most valuable asset is the ability to earn an income or their human capital. Without human capital, one’s car, house or any other financial goals are most likely not attainable. Consider this — a 30 year old earning $50,000 per year and getting a raise of 5% per year will earn over $4.5 million of total income by age 65. What further surprises me is that most people insure their house, car and life but quite often very little thought is given to protecting their most valuable asset; their human capital.
Initially this may seem like something that might not be worth protecting since everyone usually thinks of themselves as indestructible but the chances of being sick or hurt and not being able to work are surprisingly high. Almost 60% of all working Canadians will suffer a disability of 3 or more months between the ages of 25 and 65. Most people I know would have great difficulty not having an income for 3 months; so 3 years or longer would be an utter disaster. Luckily, many individuals have some form of human capital coverage. Despite this fact, one’s circumstances should be evaluated on an individual basis to ensure a sufficient amount and quality of coverage is in place.
Employment Insurance (E.I.) covers most people that are employees up to a maximum of 55% of their income from the 2nd week off the job until the 17th week. Unfortunately, there is a maximum benefit limit of $457 per week, these benefits are fully taxable and after 17 weeks the coverage ends.
Workers Compensation is another form of human capital protection in the event of a disability. The big limitation with Workers Compensation is that it only covers individuals for work related disabilities. Most people work roughly 40 hours a week so there is no coverage for the remaining 128 hours of the week. These limitations are further compounded by the fact that Workers Compensation generally doesn’t cover illnesses which account for roughly 50% of all disabilities. Additionally, most self employed individuals are not covered by workers compensation.
Disability insurance programs that are provided through one’s employee benefits can be an excellent form of human capital protection because they often offer long term benefits for both accidents and sicknesses. One should however, examine their coverage amount and the actual wording of their disability benefits. For example, most programs cover individuals for their own job description for 2 years but after that if they are able to work at any job at all, their coverage ends. Another issue that is important to consider is that if one leaves their employer, their disability protection ends as well.
Another method of addressing one’s human capital protection issues is through an individual disability insurance contract. These policies are customized to fit one’s own specifications and can be portable. As a result, if one changes employers or is in between jobs, they are still protected. This is usually the only method of protecting the income of a self employed individual since they often can not participate in the other forms of coverage. One of the biggest limitations of private disability insurance contracts is that one has to be in relatively good health to qualify for coverage.
Human capital protection is one of the most important elements of financial planning and as such should be examined carefully and regularly. I have even come across individuals that thought they had disability coverage when they in fact had none at all. If you had a goose that laid golden eggs, which would you protect first, the goose or its eggs?
Professional advice should be utilized to ensure that one maximizes their opportunities and avoids potential pitfalls.
Troy Peart B.B.A., CFP, CFA can be emailed at firstname.lastname@example.org. Your questions, comments or suggestions for future articles are encouraged.