Human capital is the economic term for what you are being paid for. This term represents your skills, knowledge and competencies. Obviously this refers to your working years.
Now, think about what would happen if you no longer were able to earn your income. This eventuality (note I don’t say possibility) of NOT earning an income comes about for a number of reasons. Some reasons can be insured (you can transfer the risk) and some reasons can not be insured (so you need to self insure through saving for the eventuality).
– Being laid off. … Requires “liquid reserves” or savings that you can access while you look for a new job.
– Retirement (where you control when). … Requires you saving for retirement where financial capital (i.e., savings) replaces your income from your human capital (i.e., working).
– Retirement (where you don’t control when). … Requires you to save a bit more for retirement than you otherwise would in order to have additional savings in case you need to transition into retirement earlier than planned.
Loss of income events you CAN insure against:
– Extended illness.
Both of these can be insured against by transferring the risk to an insurance company by purchasing disability insurance. Premiums can be customized through selecting how long the insurance pays (long vs short term with longer terms costing more), when benefits begin (waiting period with longer waits costing less … means you need more reserves), and what amount of lost income you choose to replace through the benefits (more replacement income costs more).
You may get some disability coverage through your employer however be aware that benefits received will be taxable which means the 50% coverage you may get may be further reduced yet again by say another 20% for example (actual reduction depends on your tax bracket at the time). Coverage you get privately from an insurance company will have tax free benefits.
Speaking with a disability insurance agent is how you would get more details.
Here’s a short take on Short Term Disability Insurance provided by an employer. If you don’t have employer coverage, all the points about this coverage apply to your entire need, not just the gap.