Why Disability Insurance Is The Most Important Financial Product You Didn’t Realize You Needed

What about a car accident or illness that takes a year or two to recover from?

If you are the primary income earner of your household, it could mean financial hardship, particularly if you don’t have disability insurance.

Here’s a look at what disability insurance is and why it’s an important protection for your personal finances.

What is disability insurance?

Disability insurance pays you a monthly benefit if you become disabled. Most people are wise to purchase both short-term and long-term disability insurance, as coverage for long-term disability may take six months to kick in. Short-term disability, as the name implies, starts faster than long-term coverage.

According to the nonprofit Council for Disability Awareness, the most common causes of short-term disability claims are:

• Pregnancy.
• Musculoskeletal disorders.
• Digestive disorders.
• Mental health issues, and injuries.

Long-term disability claims most commonly stem from musculoskeletal disorders, cancer, pregnancy, mental health issues, and injuries.

Disability is a common cause of bankruptcy. Social Security Disability Insurance (SSDI) and Workers’ Compensation may offer some benefits to someone with a disability, but they may not offer enough income to pay for everything you need. Disability insurance is an important backup plan if you can’t go to work and need to keep up your income while recovering.

Read more: Disability Insurance – Everything You Need To Know

Is it worth it?

Not everyone needs disability insurance. In fact, I recently spoke to an insurance broker who said I could probably avoid buying it because, as a freelance writer, there is little chance I could become so disabled that I could not work at all. Even if I broke my arm, I could use voice dictation to type out my articles.

However, disability insurance is a necessity for other people – especially those who work manual labor jobs. If you work in an injury-prone profession, you should definitely invest in disability insurance.

Disability insurance is like life insurance. If your family doesn’t rely on your income, then you probably don’t need to buy it. Clint Haynes CFP® of NextGen Wealth said he recommends disability insurance to about half of his clients, depending on their careers and their personal situations. He goes on to say:

“If you’re the breadwinner, you better have some disability insurance,”

Why is disability insurance so important?

Disability insurance replaces your income if you get seriously ill

Some of those most common disability insurance claims relate to cancer, musculoskeletal disorders, and depression. While you hopefully never have to deal with any of these unfortunate situations, they are quite common.

In fact, one of them is affecting my family right now. My dad is receiving disability insurance payments related to prostate cancer. My family never expected my dad to get a stage four cancer diagnosis at any point, but here we are. I’m so glad for my parent’s finances that they had this critical insurance coverage. You just never know when a major illness could strike.

Disability insurance replaces income if you are severely injured

Many professions carry a high likelihood of injury. If you do any kind of manual labor, your body is essential in your ability to earn an income. Construction, factory, and other manual jobs could lead to injury at work. While your employer’s insurance should cover some of your bills, it may not be enough.

You could also fall victim to a surprise injury. A slip and fall on an icy sidewalk, a car accident that isn’t your fault, a fall off a ladder, and other surprises could put you on the sidelines. You don’t get hurt on purpose. That’s why it’s called an accident.

Disability insurance could provide enough income to cover bills while recovering

Hopefully, if you do need disability insurance, it isn’t a permanent disability. Most disability insurance pays around 60% of your income. So if you normally make $4,000 per month, your disability insurance would pay $2,400 per month. That is a long-shot from what you made before but hopefully is enough to get by when factoring in emergency savings.

The Social Security Administration says that about 25% of people who are 20 years old today will be disabled at some point before reaching age 67. That’s too high of a chance to ignore.

Read more: Emergency Funds: Everything You Need To Know

Disability insurance may kick in if you can still work but not in the same capacity

Disability insurance generally comes with “any occupation” or “own occupation” rules. This determines what level of disability could qualify you for benefits.

With “any occupation” coverage, which is probably going to be cheaper for you, your insurance only starts if you can’t reasonably do any job. That means you could have to work somewhere else, or perhaps in a lower-wage position, if you are still physically able to work.

“Own occupation” means your insurance will pay if you are disabled and can’t do your own job, regardless of whether you can do something else. This is ideal, as you are probably best trained and have the best income prospects with your own job.

Disability insurance complements Social Security Disability Insurance

Social Security Disability Insurance is disability insurance you already have as a US taxpayer, but qualifying and receiving benefits is not easy.

If you do qualify and receive SSDI, it likely won’t be enough to cover all of your monthly expenses. The non-blind disability benefit for 2020 is $1,260 per month, according to the Social Security Administration.

If you have your own disability insurance, you could get SSDI as well. The combination of both insurance plans may take you well above 60% of your regular income.

Disability insurance covers short-term and long-term needs

The two main kinds of disability insurance you will come across are short-term and long-term. The names do a pretty good job of explaining how they work.

Short-term disability usually works for a period of three to six months. After that, you’ll need a long-term disability policy.

Long-term disability insurance usually has a three or six-month waiting period before benefits begin. The length of the benefit period is a big factor in the policy price. These often come in periods of two, five, or 10 years, or until retirement.

Disability insurance protects your household from a complete loss of income

If you think going down to 60% of your income sounds tough, imagine it dropping to $0. Unless you have significant savings or a spouse with a paycheck that can carry the household’s needs, a disability could be dire. Those with disabilities may have to give up their home and move in with relatives. It could lead to relying on others completely to get by.

With disability insurance, things are not necessarily easy. If disabled, however, getting disability insurance benefits is a lot better than not having the option.

Where to get disability insurance

Many people get disability insurance through their employer. This is a great benefit, but may not be enough.

You could end up changing to a job without disability insurance or become self-employed, in which case you would need disability insurance of your own.

To find disability insurance, start with an insurance marketplace like Policygenius. By doing this, you can compare quotes from multiple different insurers and be confident that you are picking the right policy for your financial needs.

Summary

Insurance is there for those bad situations you can’t predict. Just as life insurance is an important protection for your family if you were to pass away, disability insurance is an important protection for a time when you may be unable to work.

While disability insurance is arguably more important to people who are more likely to become injured or otherwise disabled, it’s a good idea for anyone who relies on their monthly income.