- As a financial planner, I see a lot of people skipping disability insurance, but it protects your income.
- It doesn’t have to be expensive; a typical long-term disability insurance policy costs 1% to 3% of your income.
- It’s better than other income replacement options, like Social Security.
Insurance is an excellent risk management tool to protect you financially against unforeseen events. But when most people think of financial risk, they think of a fire or a car accident. Few people think about losing one of their most valuable assets: their income.
As a financial planner, I see a lot of people going without disability insurance because they think they don’t need it. But that couldn’t be further from the truth.
One in four adults will be out of work for at least a year due to a disability. Very few people have enough savings to cover a year of lost income – in fact, three in 10 American adults are unable to cover a $400 emergency. Disability insurance can alleviate these situations.
Disability insurance is for everyone
Disability insurance isn’t just for workers in high-risk jobs; most injuries and illnesses occur outside of work. The most common disability insurance claims are for work-induced musculoskeletal conditions, such as back pain or tendonitis, cancer, pregnancy, and mental health issues.
If you are the breadwinner, you need disability insurance to protect your income not only for you, but also for your loved ones who rely on you. The same goes for those repaying their debts – if you find yourself out of work, you will still have to make monthly repayments.
There are two types of disability insurance: long-term and short-term. As the name suggests, short-term disability covers you for a shorter period, usually less than three months, while long-term disability insurance can cover your loss of income for years, depending on the policy you you have.
Other types of coverage are often not enough
Many people have short-term disability insurance through their employer, but it only covers you for a short time. Also, benefits usually only cover a portion of your salary and are taxable because your employer pays the premium.
Unless you are injured on the job or your injury is directly work-related, workers’ compensation generally will not cover your injury or illness.
Social Security offers some disability insurance coverage, but the application process is often time-consuming and has a 70% denial rate, and likely won’t cover all of your income. You may not have the time or savings to wait for your claim to be processed after an injury or illness. Also, the average monthly Social Security disability income benefit was $1,279 per month, which may not be enough to cover your loss of income.
Purchasing a long-term disability insurance policy can help cover some of these gaps and provide tax-free income if the unexpected happens.
Disability insurance is not as expensive as you think
The average cost of a long-term disability insurance policy is 1% to 3% of your annual salary, although costs vary.
Your job, salary, and health status are some of the factors that determine the cost of your insurance premiums. The type of policy also affects the cost, whether it is an all profession or own profession policy.
Disability insurance for any occupation will cover you if you are unable to work generally in your line of work, and your own occupation will cover you if you are unable to perform your specific job. Self-occupied policies better cover your income, but are often more expensive.
How to decide on a disability insurance plan
When considering how much disability insurance to get (or if you even need it), think about your job, how much you earn, and who would cover your bills if you become ill or injured.
Short-term policies last a maximum of 26 weeks and cover around 40-60% of your income. Long-term policies can last the rest of your life and typically replace 40-60% of your income. You should take a closer look at your current financial situation to determine how much coverage you need.
Even if your employer offers disability insurance (and especially if it doesn’t), you should purchase an individual plan. It will travel with you if you quit your job, so you’ll still be covered.
One strategy that I personally use and recommend is to ladder your disability insurance policies, which basically consists of holding long-term and short-term disability insurance policies. Short-term disability policies have a short waiting period before benefits are paid, while long-term disability policies have longer waiting periods, usually around 90 days. Laddering your policies allows you to start getting paid right after an illness or injury.