Most people overlook disability insurance. Here's a guide to why you need it, along with what kind and how much.
While most people see the obvious benefits of life insurance or health insurance, disability insurance is often overlooked. But it’s just as important a part of your financial plan as other types of insurance. Disability insurance ensures that you have income coming in even if you’re sick or injured to protect all of your financial plans. The short answer to if you need disability insurance is “yes.”
It’s not just about knowing that you need disability insurance, but what kind of disability insurance policy you need. Read on to learn about:
If you work, have people relying on your income, and aren’t financially able to go years, or even just months, without a paycheck, you should consider disability insurance.
Why do you need it? Because most people are unprotected and at risk of not being able to pay bills or support their families. Consider the following:
Over 25% of American workers experience a long-term disability longer than three months at some point in their careers.
69% of workers have no long-term disability insurance coverage.
62% of all U.S. bankruptcies and more than 50% of all mortgage foreclosures stem from illness or injury-related medical issues.
You may think that disability insurance is just for accidents and that you’re not at risk if you don’t work a dangerous job. However, 90% of long-term disabilities result from illness rather than accident, meaning they can affect you no matter what you do for work. Even white collar professions like doctors and lawyers need disability insurance — in fact, because of the expensive educational investments in these fields, they benefit even more from disability coverage.
If you don’t have disability insurance, you risk not being able to cover everyday expenses, pay regular bills, or keep up with your larger financial plan. Disability insurance protects your most valuable asset — your ability to earn an income — and should be considered a part of every financial safety net.
Once you realize you need disability insurance, you need to decide what kind of disability insurance. Most provide the same sort of protection but under very different circumstances, so it’s important to choose the right one. The options available to most people are:
Long-term disability insurance
Short-term disability insurance
Employer-provided disability insurance
Social Security disability insurance
Long-term disability insurance (LTD) should be the first option for most people looking to protect their income.
LTD provides income when you’re unable to work for at least two years, and can last all the way to retirement. The best part about long-term disability insurance is that, for the most part, benefits are distributed tax-free and can be used on whatever you need them for. You have the freedom to use it as needed and can maintain your lifestyle.
Long-term disability insurance is the most cost-effective form of protection you can get. When it comes to length of coverage, benefits received, cost, and ease of qualification, there are no other options that give you the most for your money.
Learn more about when and why long-term disability insurance is worth it.
Some people would rather purchase a short-term disability policy instead, thinking that they’ll recover soon and won’t have to pay for a long-term policy. But most short-term policies max out at six months of coverage, well short of the 36 months an average disability lasts.
The monthly premiums for short-term disability are also relatively close to those of LTD. Considering you get much more coverage with LTD, it makes it the more cost-effective product.
It’s also easier to buy long-term disability insurance. You can go to essentially any insurance company and buy an LTD plan, but there are relatively few options for buying a private short-term plan. Which brings up a time when short-term disability insurance might be worth it: if you can get it subsidized by an employer.
Some workplaces over subsidized short-term disability, making the cost cheap or even free. If this is the case for you, you should consider it. Short-term disability can complement LTD by providing coverage before your long-term benefits kick in, but if you have to foot the entire bill yourself it’s likely not worth the cost.
Learn more about when short-term disability insurance is worth it.
While long-term disability is a good choice, and short-term policies can work in the right circumstances, there are other forms of disability insurance that you should be wary of because they leave you unprotected in the long run.
Employer-sponsored long-term disability insurance Like short-term disability insurance, if you’re able to get LTD subsidized through your employer, it’s worth looking into. However, it isn’t a good replacement for a private long-term policy. The coverage amount through an employer plan can be limited, and it’s tied to your employment so you’ll lose coverage if you leave the job for whatever reason. A private policy is portable and will follow you to any employer you’re with.
Social Security disability insurance (SSDI) Social Security disability insurance is used as an excuse for not buying a private disability policy, but most people don’t realize the limitations of SSDI. It’s extremely hard to qualify for, largely because you have to be unable to work at all, rather than just unable to work in your profession. Even for people who do eventually qualify, it can take appeals and many years, and the benefit amount is relatively low. Learn more about why Social Security disability insurance isn’t worth it.
Workers’ compensation Many people have workers’ comp through their employer, but this only covers disabilities that occur on the job. That means it only kicks in in a small portion of incidents and shouldn’t be relied on for comprehensive coverage. Learn more about workers' comp qualifications guidelines in your state.
Once you’ve determined that a) you need disability insurance and b) long-term disability insurance is likely your best option, you have one final needs-based decision to make: how much you need. You should take three things into account when determining how much additional protection you need:
Coverage amount Long-term disability benefits will pay around 60% of your gross monthly salary, short-term disability benefits up to 80%, and SSDI pays under $1,200 a month. Make sure your benefits cover any bills and immediate expenses, but don’t forget about savings and long-term plans like retirement that require investment as well.
Duration The average disability lasts for around three years. A long-term insurance disability policy that lasts five years should be the minimum duration, but a policy that lasts until retirement provides the maximum protection (and usually isn’t much more expensive than a five-year policy). When determining how long benefits should last (known as the benefit period), you should also consider when they start. This is called the waiting period, or elimination period. Ninety days is the most cost-effect elimination period. Learn more about disability insurance elimination periods.
Cost The amount of disability insurance you have depends in part on what you can afford. The cost is determined by coverage amount and duration, along with other factors like age, health, and gender. However, most people can expect to pay between 1-3% of the annual income on disability insurance. SSDI and workers’ compensation are free, and employer-sponsor disability benefits are subsidized, but be sure to factor in indirect costs — the aforementioned limitations of these forms of protection — as well. Learn more about long-term disability costs.
How much disability coverage you need depends on your individual financial circumstances, including your ability to self-insure with savings. Learn more about how much disability insurance you need.
Colin Lalley is the Associate Director of SEO Content at Policygenius in New York City. His writing on insurance and personal finance has appeared on Betterment, Inc, Credit Sesame, and the Council for Disability Awareness.