Most of us feel we are doing fine if we have the four horseman of the insurance industry covered: health insurance for our physical needs, auto insurance for when we drive, home/renter’s insurance for our property and life insurance to provide for our family in case of a death. Beyond these four we think insurance products are unnecessary and a waste of money.
You might want to check that negative sentiment while you read this post. While all four of those are important, they aren’t the end-all to insurance products. In fact, disability insurance, the one many people forget about, could be the most important coverage you buy. Here’s why.
The big reason you need disability insurance is that your income is the #1 tool for generating wealth. If for some reason you cannot earn that income your chances of being able to adequately care for yourself and your family decrease dramatically. A loss of income jeopardizes your present needs and your future financial goals. So unless you have substantial savings and investments to cover the time where you are out of work, disability insurance is your best bet to manage through the difficult times.
What is Disability Insurance?
Disability insurance protects you against loss of income due to injury or illness that prevents you from working. Like all other insurances, you pay the insurance company a monthly premium and they provide you coverage that replaces a portion of your income should you be unable to work.
Disability insurance comes in two forms:
- Short-Term Disability (STD). This covers you for a shorter period of time. It has a waiting period of 0 to 14 days before it begins to pay. The benefit period (the time frame in which you receive money) lasts no longer than 2 years.
- Long-Term Disability (LTD). As the name implies this covers you for a longer period of time…much longer potentially. You may experience a waiting period of several weeks up to 6 months before receiving payment (which is why it would be so important to have a fully funded emergency fund to cover the initial timeframe before you started receiving disability payments).
Depending on the policy terms, LTD could last a few years, until you reach retirement age, the rest of your life or simply until you go back to work. It’s designed to protect you from a catastrophic illness or injury that ends (for a time or permanently) your ability to work.
Of these two I’d be most concerned about long-term disability coverage. If you’ve been managing money wisely you might be able to whether a 6-12 month work absence by tapping into savings or investments. What I’d worried about the most would be loss of income over decades and decades.
Now LTD won’t replace your entire income. It does however provide a bridge (usually 50- 60% of your salary depending on the policy terms) so that you could manage your financial life. Of course you’d have to cut back on expenses and perhaps reduce your lifestyle. But at least you’d have some money coming in on a consistent basis to meet your daily needs.
Do I Need Disability Insurance?
The question I think most people ask when looking at additional budget expenditures is “Do I really need this?”
We weigh the factors involved and justify whether or not the added expense is worth it. In the case of disabilities we could easily rationalize this insurance away with thoughts like these:
“I don’t think I’d ever need it. I work an office job.”
“Workers compensation will take care of me if I am disabled.”
“Only men/laborers need disability insurance.”
“I’m young and fit so shouldn’t have to worry about it.”
Those arguments against disability insurance are based on misinformation and unsound logic. They ignore recent statistics like these:
- Over 1 in 4 of today’s 20 year-olds will become disabled before they retire
- Over 37 million Americans are classified as disabled, with more than 50% of those being in their working years
- Over 2.5 million disabled workers in their 20s, 30s, and 40s were receiving benefits in December, 2012
- A typical mid-30s female, age 35, 125 lbs, non-smoker, who works an office job, lives a healthy lifestyle with some physical activity has a 24% of becoming disabled for 3 months or more and a 38% chance that disability will last longer than 5 years (the typical male profile only has 21% chance of a disability lasting 3 months or more).
- The leading causes of disability claims in 2012 were musculoskeletal/connective tissue disorders (28.5%) and cancer (14.6%)
- Less than 5% of disabling accidents and illnesses are work related (meaning worker’s comp doesn’t cover 95% of issues).
- The average group long-term disability claim lasts 34.6 months
(Source: Council for Disability Awareness)
On the one hand it makes sense we ignore this. We overestimate our indestructibility. Stuff happens to other people not us. That’s what we tell ourselves.
The statistics would say otherwise. If you are right out of college you have a 25% of being disabled in some fashion before retirement. Those are too big of odds to ignore.
If you’d like to calculate your own chance of being injured or becoming ill you can find out your own Personal Disability Quotient (PDQ) at whatsmypdq.org.
What to Do Next?
The first place you should look for disability insurance is through a group plan with your employer, a union or a professional organization. If you can’t find a group plan or think the coverage is inadequate, then you can shop the open market for an individual plan. You will end up paying more for an individual plan on the open market but it still may be worth the cost considering what’s at stake.
Beyond the cost there are differences between group and individual plans. You will have various options to consider when purchasing a plan. It will be important for you to read the individual plans, ask questions and make sure you fully understand what’s promised and when the money will be available.
Perhaps most importantly you must look at your lifestyle. Are you engaged in behaviors that might lead or contribute to a debilitating illness? If so learn how to embrace a healthy lifestyle so as to reduce your chances of becoming disabled.
Don’t fool yourself into thinking disability insurance is a fringe financial product you can do without. Based on statistics it should be on everyone’s to-do list.
Questions: Do you have disability insurance? Have you ever been disabled or known someone who was? How did you/they manage to get buy? Did they have to alter their lifestyle to cope with the decrease in income?