Do I need disability insurance? Is a question I have been asked more times than I can count. My response is always the same. Does your family depend on your income? Whatever the answer is to that question, the answer is the same to the first question.
It really is that simple.
You are 3-4 times more likely to be injured and need disability insurance than you are to die during your working years and need life insurance. Like death, disability can strike suddenly and without warning.
This hits close to home for me. My own mother has been a nurse for 35 years. A few years ago she started working a local rehabilitation center making over $80,000 per year. Things were going well for her. House was almost paid off. A new car that would be paid off in another two years. And she was putting away lots of money for retirement with ease.
Then one day her knee gave out and she fell. Her entire leg pretty much went numb. After a visit to the hospital, they decided it was a herniated disc in her back that was pinching a nerve and caused her leg to go numb. That meant surgery and at least a 3-4 week recovery. The surgery went off without a hitch, but the symptoms persisted and started getting worse.
Her vision started giving her problems. She was seeing double or things out of place at times. She started losing her equilibrium.
Fast forward two years and she has been unable to work. She cannot even drive herself anywhere and can only walk with the assistance of a walker. The $80,000 a year job is gone. If it had not been for her disability insurance she likely would have had to sell her home or the financial burden would have fallen to my siblings and I.
From personal experience, I cannot overstress the importance of each member of your household with a vital income stream having coverage against disability.
Before we go any further, let’s cover some common myths I encounter about disability insurance.
MYTHS ABOUT DISABILITY INSURANCE
I am covered through Social Security. Many people are under the false assumption that they can fall back on Social Security should they become disabled. What they do not realize is that qualifying for Social Security disability is difficult. It is also a long process. In my mom’s situation that I discussed above, it took about six months to get approved for Social Security disability coverage. No payments come in until you are approved. Could you wait six months?
To qualify, you don’t just have to prove that you can no longer do your job. You have to prove that you cannot do any job. If you are an airline pilot and can no longer perform your job, but you can work at a car wash cleaning cars, you will not qualify.
Even if you do qualify, on average the payouts are about 40% of an individual’s previous income.
Worker’s compensation covers me. Worker’s compensation covers you only if an injury or illness occurs while on the job. If you are in a car accident, you are not covered. If you are diagnosed with a debilitating illness like Parkinson’s, you are not covered.
Only old people need to worry about disability insurance. If anything, I would say the opposite is true. Many times older people have put away more in retirement savings and could shoulder the financial burden of becoming disabled easier than a much younger person.
For these reasons and more, it is important that you protect yourself and your family by making sure you have proper disability insurance. If your employer does not provide disability coverage and you have to shop for it on your own, the good news is that if you ever need it, the payouts are 100% tax-free.
When you start shopping for disability insurance, one important concept to understand is the elimination period. The elimination period is the length of time it takes to start receiving benefits after you apply for them. The shorter, the elimination period, the higher the premiums.
It is a good idea to take a financial accounting of your situation. How much money do you have saved up? How long could you continue to meet all of your financial obligations if your income stream was cutoff? If you can make it for a long period of time, it is a good idea to take a longer elimination period to cut your premiums substantially.
Short-Term Disability vs. Long-Term Disability
A short-term disability policy normally covers a percentage of your lost salary should you become ill or injured and cannot work for more than a few days. Short-term disability insurance normally does not kick in until you have exhausted all of your sick leave and vacation time. The length of coverage varies, but six months is the typical length of coverage.
Long-term disability insurance picks up after you have used up your short-term disability coverage. It may cover you for five to ten years. I recommend purchasing a policy that covers you up until the age of 65, when Social Security disability can kick in.
Shopping for Disability Insurance
The most ideal option is to get it from your employer if they offer it. Many employers offer short-term disability as a paid option for employees, but offer long-term insurance at no cost to employees. Some employers share the cost of premiums, while others pay 100% of them.
If your employer does not offer it as an option, you will need to shop in the public marketplace. It is going to be expensive, but it should be viewed as a necessary expense, just like your mortgage and car payments.
At age 65, drop the coverage. Every insurance provider considers you to be retired at that age and won’t pay out any benefits, even if you are still working. There is no point in paying for the premiums anymore at that point.
Hopefully, you will never need to utilize disability insurance, but having it and not needing it is a far better option than not having it and needing it.