Disability insurance protects your most valuable asset — the ability to earn an income. If you experience an injury or illness that prevents you from working, your disability insurance policy will replace a percentage of your earnings while you recover.
Although disability insurance is vital to financial health, as someone in the insurance industry I’ve found that it is often overlooked due to misconceptions about how it works and the likelihood of needing to file a claim. Here are four reasons for considering disability insurance in your financial plan.
Unexpected disabilities are more common than many people think.
The chances of becoming disabled are higher than most people realize. According to the Social Security Administration, over a quarter of today’s 20-year-olds will experience a disabling injury or illness before they reach normal retirement age. In fact, you are more likely to become disabled than you are to die at any point during your working career.
What constitutes a disabling event is also commonly misunderstood. Serious illnesses, such as cancer and heart disease, and musculoskeletal disorders, such as arthritis and back pain, account for the vast majority of long-term disability claims. Meanwhile, injuries stemming from accidents make up only a small percentage.
Disability insurance allows you to prepare for the unexpected now by protecting your future income. By putting a policy in place when you are young and healthy, you will also be able to lock in lower rates.
Financial obligations don’t disappear.
Financial obligations come in all shapes and sizes. But what happens to those financial obligations when you are no longer able to fulfill them?
Homeownership is a perfect example. In most cases, buying a home will require taking out a mortgage loan for financing. This is a major financial obligation that requires a steady stream of income to fulfill.
Even the best health insurance coverage will not make up for the income you lose while you are unable to work. Workers’ compensation only applies to accidents on the job. If you’re lucky, paid sick leave and your emergency fund savings will be able to provide some relief, but likely not for long.
Individual long-term disability insurance can keep you afloat financially for the length of the benefit period on your policy (anywhere from two years up until retirement).
Your family most likely relies on you.
When it comes time to start a family of your own, there are a number of serious financial decisions you need to make. This includes preparing for what could go wrong.
For many, life insurance is the first thing that comes to mind. You want to be able to protect and provide for your loved ones if you pass away. It makes perfect sense when you consider that 70% of working Americans would experience financial hardship within a month of losing their paycheck. The loss of any income can be devastating, but especially if it’s the primary breadwinner’s.
The reality is that disability insurance belongs in a financial plan just as much as life insurance does. It’s important to note, though, that one is not a substitute for the other. Together, life and disability insurance can provide you and your family greater financial peace of mind.
Disability coverage through work is often insufficient.
One way to get disability insurance coverage is through an employer-sponsored group plan. While group coverage is inexpensive and nice to have, it’s rarely enough by itself.
Group disability insurance plans typically place a cap on benefits. This can be problematic for high-income earners because benefits are cut off at a certain dollar amount. Group disability coverage uses your base salary, which means it does not account for commissions or bonuses earned, and benefits are taxed. If you leave your employer, you lose your coverage. Even if you stay, your employer can decide to cancel the plan.
Meanwhile, individual disability insurance allows you to select a higher benefit amount based on your total net income. Premiums are paid with after-tax dollars, so any benefits you receive will not be taxed.
Who doesn’t need individual disability coverage?
For many working professionals, an individual disability insurance policy can serve as a viable financial safety net. However, just because you earn an income doesn’t mean you need to have individual coverage.
You may be able to get by without individual disability insurance if the group plan offered by your employer covers at least 60% of your monthly income. Group coverage has its limitations, but it may be sufficient in some cases.
Those who have enough emergency and retirement savings to weather a prolonged disability can likely do without an individual plan, as well. It just depends on how long you could last without being able to earn a paycheck.
If you earn an income but do not rely on it to meet your financial needs, there’s a good chance you can skip buying a policy, too. In that case, it’s better for the primary breadwinner of the household to put a plan in place.
Whether you are making a career change, becoming a homeowner or starting a family, disability can happen to anyone at any time. Fortunately, disability insurance is designed to provide financial protection against injuries and illnesses throughout your working years. These four reasons demonstrate why it’s important to consider disability insurance in your financial plan.