Is Disability Insurance Really Necessary?

Insurance in general really annoys most of us, doesn’t it? We pay for something every month and get absolutely nothing in return—until we do. When money’s tight, it feels like an incredibly painful, albeit necessary, expense, and in better times, does it ever really spark joy? (That was rhetorical. We all agree it doesn’t.)

HOWEVER—when it finally kicks in, we sit back with a huge sigh of relief that it was there all along. So, while this topic is neither fun nor fascinating, we’re here to provide a bit of food for thought on insurance today.

Keep in mind, nothing derails a financial plan or budget worse than a major blow to your bank account that could have been avoided. One crucial type of coverage that often gets overlooked is disability insurance. Many wonder: Is disability insurance really necessary? The short answer is yes.

The Reality of Risk

We tend to believe that long-term disability is something that happens to “other people.” In reality, statistics paint a very different picture. According to the Social Security Administration, more than one in four 20-year-olds today will experience a disability before they reach retirement age. And while the term “disability” might conjure images of catastrophic injuries or illnesses, many long-term disabilities stem from more common conditions like chronic back pain, mental health issues, or illnesses such as cancer or heart disease.

Disability insurance helps replace a portion of your income if you’re unable to work due to illness or injury. Without it, you could be left trying to navigate daily life without a steady paycheck, even though your living expenses—rent, mortgage, groceries, utilities—don’t stop.

What Does Disability Insurance Cover?

There are two main types of disability insurance: short-term and long-term.

• Short-term disability insurance typically covers a portion of your salary for a few months, often up to six months. It’s designed to help you through a temporary recovery period, like after surgery or a short illness.
• Long-term disability insurance kicks in after short-term coverage ends and may provide income replacement for a much longer period, sometimes until retirement age. This is critical for major, long-term health issues or injuries that prevent you from returning to work for an extended time.

Understanding Employer-Provided Benefits

Many people believe that if they have disability insurance through their employer, they’re covered. However, it’s important to understand the limitations of employer-provided plans:

• Coverage gaps: Employer disability insurance may only replace a percentage of your base salary, leaving bonuses, commissions, and other compensation uncovered. If your plan only covers 50-60% of your base pay, this might not be enough to meet your living expenses, especially if you already live on a tight budget.
• Tax implications: If your employer pays the premium, any benefits you receive could be taxed as income, further reducing the amount you take home.
• Portability: If you change jobs, employer-provided disability insurance may not follow you. You’ll need to consider getting your own policy to ensure continuous coverage.

How to Assess Your Need for Disability Insurance

While everyone should consider disability insurance, it’s especially important for those who:

1. Are the primary breadwinners: If your income is essential to your household, a prolonged absence from work could lead to significant financial strain.
2. Have dependents: Parents or caregivers may need disability insurance to ensure they can continue providing for their children or loved ones in the event of an illness or injury.
3. Have limited savings: If you don’t have enough in savings to cover six months or more of living expenses, disability insurance can be a financial lifeline.
4. Work in high-risk jobs: Certain occupations, like construction, healthcare, or manual labor, come with a higher risk of injury. However, even desk jobs aren’t immune to long-term disabilities caused by illnesses or chronic conditions.
5. Are Self Employed: If you lack employer-provided coverage and your income directly depends on your ability to work, ensuring income continuation and business overhead coverage if you become unable to work due to illness or injury is crucial.

Calculating the Cost

You might be wondering whether disability insurance is worth the cost. Premiums for individual disability insurance policies typically range from 1-3% of your annual income, depending on factors such as your age, health, occupation, and the amount of coverage. While this might seem like a significant expense, consider the financial devastation of losing your income entirely due to a long-term illness or injury.

Here are some places to consider when shopping for disability insurance – do your own due diligence before reaching out to an insurance agent or financial advisor:

• Life Happens offers a free disability insurance needs calculator that allows you to input your financial information, such as your monthly expenses, savings, and current income. The tool then provides an estimate of how much disability insurance you may need to maintain your current lifestyle if you were unable to work.
• Policygenius offers a calculator that helps you figure out how much disability insurance you need based on your current expenses, income, and savings. It’s designed to simplify the process and connect you with policy options from various insurance providers.
• Some professional associations or alumni organizations offer group rates on disability insurance for members. These plans can be more affordable and have fewer underwriting requirements.

The Bottom Line: Protect Your Income

Disability insurance is essentially insurance for your paycheck. While we’re quick to insure our cars, homes, and health, we often neglect to protect our ability to earn. The consequences of being without income for months or even years can be financially ruinous for many.

The need for disability insurance ultimately depends on your personal circumstances, but for most people, it’s a wise investment. After all, the risk of a long-term disability is much greater than many of us realize, and the peace of mind that comes with protecting your financial future is invaluable.