Health coverage can't cure money woes: How to find disability insurance



Myles Ma

Myles Ma

Senior Reporter

Myles Ma is a senior reporter at Policygenius, where he covers personal finance and insurance and writes the Easy Money newsletter. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

Updated|4 min read

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

Hospitals stays are expensive. Medical insurance helps, but doesn't really cover the long-term economic consequences of getting sick or injured. A study published in 2018 in "American Economic Review" finds hospital admissions are linked to lower probability of being employed and declines in earnings.

Disability insurance protects your income if you can't work due to illness or injury. But, the study notes, "Employer provision of sick pay and private disability insurance is fairly sparse, and public disability insurance is available only after a lengthy application and approval process."

Plus, people who look for long-term disability insurance can experience sticker shock when they get quotes.

The numbers show people need more income protection than they're getting if they're hospitalized. In the first three years after a hospital admission, 50- to 59-year-olds experience an earnings decline of about 19% compared to before hospitalization, according to the study, "The Economic Consequences of Hospital Admissions." Health insurance can help by covering more than 90% of the medical costs associated with a hospital admission, but health coverage still only reduces earnings declines by less than 10%.

"In other words, for those who have it, insurance for medical expenses is fairly comprehensive, while insurance for income declines is substantially less complete," the study said.

But fret not — you can still get coverage that doesn't risk your financial health. Here's how:

Finding affordable disability insurance

So how can you get disability insurance without going broke? We asked Tyler End, Certified Financial Planner and general manager of disability product for Policygenius, for advice on getting affordable disability insurance.

1. Shop around

Many agents only show you options from one or two carriers, End said. Brokers like Policygenius, however, will find the insurer that offers you the best rates. Make sure you talk to someone who is familiar with a variety of products.

2. Don't always buy the maximum benefit amount

Consider how much income you'll actually need if you can't work. You don't always have to pay for the maximum benefit amount. Tally your fixed costs and factor in any income your spouse makes, End said.

"But don't neglect retirement savings you would lose out on if not working," he said.

3. Don't buy the maximum benefit period

Many people pick policies that pay out until age 65. That makes sense if you're early in your career. But the average time people are out of work from injury or illness is about three years, End said.

Because of that, buying a five- or ten-year plan makes sense, especially if you're later in your career. In addition, a catastrophic disability lasting more than five years may qualify you for Social Security Disability Insurance.

4. Lengthen the elimination period

The elimination period is how long you have to wait before the insurer pays out benefits. Making that period longer is an easy way to reduce your costs, End said.

A 90-day elimination period (the length of time after a claim before an insurance company pays benefits) is most common, but extending it to 180 days can lower your premium. Just be sure your emergency fund can cover your expenses during this time.

5. Consider own-occupation coverage

Everyone should have own-occupation coverage, which pays a benefit if you can't work in your own field, but there are two kinds, End said. Own-occupation not working means your benefit goes down if you start working in another occupation. True own-occupation pays a benefit even if you are working in another occupation.

"Most people prefer the stronger true own occupation coverage, but if you need to save money, own occupation not working is a great option," End said.

6. Skip the cost-of-living adjustment rider (COLA)

Many agents sell cost-of-living adjustment riders, which increase benefits along with inflation during a claim. But since most claims average three years, the benefit isn't that high. Better to save the extra money in an emergency fund, End said. You may instead want to buy a future increase option that allows you to increase coverage as your income rises.

7. Skip the non-cancelable rider

Most individual policies are guaranteed renewable, so the insurance company can't cancel your policy as long as you pay the premiums, End said. A non-cancelable rider keeps an insurer from changing the premiums, but there's little risk of that. It's very difficult for insurance companies to change premiums. They have to prove to state insurance commissions that they're losing money on an entire occupation class in their state, End said.

"Especially if you are later in your career, the risk of a price change is low and it's better to save the premium dollars," he said.

The most important thing to remember when buying disability insurance is: Some coverage is better than none. Illness and injury can wreck your finances, and any buffer helps.

Image: Evgenij Yulkin