We spend a lot of money protecting things.
There’s life insurance to protect our loves should something happen to us. Health insurance pays for the cost (or some of the cost) of medical care. Long term care insurance pays for skilled care should we need it when we’re older.
Then there’s car insurance, house insurance, identity protection, and cell phone insurance to protect our stuff.
But what about our ability to earn an income? Is that protected? Does it need to be?
Here’s the numbers: Approximately 30% of all people from 35 to 65 will suffer a disability for at least 90 days at some point, and about one in 7 can expect to become disabled for five years or more.
While we have a 100% chance of death in our lifetime, the odds of dying unexpectedly are much lower than the statistics I just referenced.
And that’s where disability insurance comes in. It’s income insurance.
I’m going to provide you an overview of this important coverage so you can better understand how it may fit into your overall financial situation.
Here’s what we’ll cover:
- What it is
- Why it’s so important
- The different types of policies
- How much is needed
- How to get it
- How much it costs
- How to keep your policy up to date
- How the policies actually work
- Social Security disability
Let’s get started.
What it is
Disability insurance is designed to replace a portion of your income (commonly 45 to 80%) should you become disabled due to injury or illness and are unable to work.
There are many types of policies providing protection in many different ways. Some policies cover short-term disability, and some cover long-term. Some policies provide a benefit if you’re unable to perform your specific job, while others provide a benefit if you’re unable to work at all.
The starting point is figuring out if you need the coverage, then finding the right policy type for your individual situation.
Why it’s so important
How long would you be able to go without a paycheck?
The unfortunate reality for many Americans is, “I couldn’t.” But we’re not talking about most Americans, we’re talking about you.
I was less concerned about disability insurance when I was single with no kids and no mortgage. Today, with all of those things, disability insurance is of much greater importance to me. It’s essential for my peace of mind to know that I’ll have income to pay my bills should I be unable to work.
If you earn an income from work that would disappear if you were unable to do your job, you should have disability insurance.
The different types of policies
Short-term disability policies typically replace your income for around three months. This type of policy is less expensive than long-term disability because the amount at risk is less. Put another way, if you had to use your short-term disability policy, the insurance company would be on the hook for less money than a long-term policy.
Long-term disability policies can replace your income for extended periods of time, including your entire life. Because the insurance company is on the hook for a potentially far greater amount of money, these policies are much more expensive.
You may also qualify for a disability benefit through Social Security, and I’ll cover that more in depth at the end.
How much is needed
To determine the proper amount of coverage, simply add up all of your monthly expenses.
Next, take into consideration any existing resources which can meet your income needs such as cash or a disability policy through your employer.
Once you have those numbers, you’ll be able to determine the monthly benefit you’ll need a disability insurance policy to provide you.
How to get it
There are three common ways to get a policy.
The first is through your employer as an employee benefit. These policies are typically the easiest to qualify for because they will require the least amount of underwriting. I highly encourage you to explore the available coverages.
Second, if you work in a specialized field, you may be eligible for a policy through a professional association. For example, if you’re an attorney, your local bar association may offer disability policies. It certainly makes sense to explore this option as you may be eligible for discounted coverage.
Third, you can individually purchase a policy directly from an insurance company. This option will give you the greatest flexibility and ability to personalize your policy. It will also be portable, meaning it will not be dependent on where you work.
As you’re evaluating your options, it’s important to start with understanding how much monthly benefit you’ll need from your policy, and how long you want the benefit to last for.
How much it costs
There are many factors which go into the premium amount, including benefit amount, benefit duration, your health and others. A personally owned policy commonly costs around 1 to 3% of your annual salary.
As I mentioned earlier, the greater the monthly benefit and the longer the coverage, the higher the premium will be.
How to keep your policy up to date
As your life changes, so should your policy. When you change jobs, receive an increase in compensation, increase monthly expenses, or experience other material changes, it’s wise to update your policy accordingly.
Scheduling an annual policy checkup makes sense to ensure your coverage is meeting your current needs.
How the policies actually work
Should you need to use your policy due to illness or disability, you’ll file a claim. This can be done through your employer if through your work, or directly with the insurance company if you own an individual policy.
There will be an elimination period which must be met, then the insurance company will begin paying your claim and you’ll begin receiving benefits.
Social Security disability
Qualifying for disability benefits through Social Security is traditionally very difficult.
To be eligible for disability benefits through Social Security, you must:
- Be unable to work because you have a medical condition that is expected to last at least one year or result in death
- Not have a partial or short-term disability
- Meet SSA’s definition of a disability
- Be younger than your full retirement age
While it certainly makes sense to explore the available benefits should you be unable to work, the prudent decision is to ensure you’re covered through the policies I talked about earlier.
Conclusion
We spend a lot of money insuring our golden eggs, and forget to insure the golden goose. Disability insurance polices protect you and your loved ones should you be unable to work and earn income.
While these policies can be confusing, there are professionals available to help you make a sound decision.
Check out our The Right Coverage course to ensure you’ve got the right protections in place.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
We’ve got three free courses as well: Our Goals Course, Values Course, and our Get Out of Debt course.
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