Investing in ETFs or Disability Insurance
Many think that investing in ETFs is better than paying a premium for disability insurance, but that is not always the case. Why? 🤔 Read on to find out whether investing in ETFs or disability insurance is better.
Key Takeaways
- Disability insurance protects you financially if you become unable to work due to e.g. an accident, (mental) illness, or immobility.
- The average lifetime earnings potential is 1.2 million. To reach a similar figure through disability insurance, you need 2.000€ net.
- As a 27-year-old, you have to cover yourself for 40 years. This costs you about 75€/month, but you also lose 7% return per year.
- Investing in ETFs or disability insurance cannot be compared as these two things serve very different purposes.
Introduction: Why Disability Insurance is a Must-have Insurance
Most people rely on being able to work to fund their lives. Disability insurance not only protects your health, but also your assets and therefore your savings that you have worked hard for. So what can you do if you don’t want a possible disability or accident to eat up your money?
This is where disability insurance comes in. This protects you financially if one of the above scenarios should occur. Thus, you will continue to receive a monthly income even if you are no longer able to work for it. Depending on how much you are ultimately willing to pay each month and how good the selected insurance is, you will then receive a monthly disability pension.
Now, however, many people feel they are throwing money away if they never need the insurance and therefore feel that investing is much better. In this article, we will compare exactly that. Read on if you want to know whether investing in ETFs or disability insurance is better.
Calculation: Investing in ETFs or Disability Insurance
The average German salary for full-time employees in 2022 was around 4.105€ per month or 2.590€ net monthly income. If you’re 27 and have 40 years of work ahead of you, earning an average income of 2.500€ monthly, then your lifetime earning potential is around 1.2 million – but this is the low-end estimate.
A 27-year-old that wants disability income insurance that would pay 2.000€ per month net, in case he’s disabled, would cost around 75€ per month on the cheaper end of things. With the same calculation we used above, here’s how much this person would pay throughout their life for disability insurance:
- 75€ per month x 12 months x 40 years = 36.000€
This may sound like a lot of money, but paying 36.000€ in premiums to insure 1.2 million is not a bad deal! In other words, you would pay only 3% of the potential payout to protect your lifetime earnings.
Why This Comparison is Dangerous & Wrong
Although the 36.000€ will indeed go to waste if you never become disabled, this isn’t how you should think of it. Let’s start with this table, showing you how much you will pay over the years for disability insurance, comparing this with the opportunity costs of not investing the premium that you’ll be paying into disability insurance.
| Years | Premium (75€/month) | Opportunity Costs (7% yearly return) |
|---|---|---|
5 | 4.500€ | 6.415€ |
10 | 9.000€ | 14.099€ |
15 | 13.500€ | 24.804€ |
20 | 18.000€ | 39.720€ |
25 | 22.500€ | 60.502€ |
30 | 27.000€ | 89.457€ |
35 | 31.500€ | 129.798€ |
40 | 36.000€ | 186.005€ |
Based on the chart above, disability income insurance is not costing you just 36.000€; it’s actually costing you 186.000€ because you have the opportunity cost of your money not growing at a 7% rate of return.
The main argument for not getting this kind of insurance is the idea that your investments could cover the cost of your disability. The average disabled person is disabled for around six years. So here’s the question – when do you have enough to pay your own disability “insurance” out of your own investments for a full six years?
First, we need to refer back to the table above, which has a missing component – taxes! You have to pay a 25% capital gains tax on your investments. Let’s correct the table above so you can see your net investments after taxes, plus how many months it would take to pay yourself a 2.000€ per month pension.
| Years | Premium (75€/month) | Opportunity Costs (7% yearly return) | Net Investments (after tax) | 2k/Month Pension |
|---|---|---|---|---|
5 | 4.500€ | 6.415€ | 6.161€ | 3 |
10 | 9.000€ | 14.099€ | 13.049€ | 7 |
15 | 13.500€ | 24.804€ | 22.203€ | 11 |
20 | 18.000€ | 39.720€ | 34.515€ | 17 |
25 | 22.500€ | 60.502€ | 51.227€ | 26 |
30 | 27.000€ | 89.457€ | 74.068€ | 37 |
35 | 31.500€ | 129.798€ | 105.449€ | 53 |
40 | 36.000€ | 186.005€ | 148.504€ | 74 |
Since the average disability lasts around 72 months, you’ll never be able to pay your own disability pension until you’ve been working for 40 years, which is when you’ll be retiring anyway. Until you’ve accumulated enough money to pay your disability expenses, you need this insurance – whether you like it or not!
Not getting disability insurance only works under one circumstance: that you will never be disabled. However, no one knows if, when, or how long you can become disabled.
You might be thinking – but I’ve been healthy all my life! Well, past performance is no guarantee for future results.
If you’re thinking – but I have an office job! While this might account for accidents, accidents account for only 9% of disabilities in Germany. If you get cancer, a mental health condition, or a motion disability, you may be unable to work your office job.
Investing in ETFs or Disability Insurance
On average, one in four people in Germany becomes incapacitated for work for about six years during their working life. So since this is an unpredictable event, this insurance exists. And since this is synonymous with an enormous financial burden, occupational disability insurance is also a must-have insurance.
Although many would like to compare investing in ETFs or disability insurance, these two things cannot be compared. This is because these two things serve very different purposes, and you should not choose one or the other – you should have both!
If you would like to discuss your individual financial situation with us and whether disability insurance makes sense for you, please feel free to arrange a free meeting with us. We will then determine together whether it makes sense for you. If necessary, we can also help you choose the right disability insurance for your situation.
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