I occasionally receive questions from readers that ask about a number of financial issues, and a recent reader asked: “Is is smart to buy disability insurance?” Of course, without understanding someone’s complete financial situation, it is impossible to give a straight “yes” or “no” answer, I can provide some insight as to when it is smart to buy disability insurance.
Before jumping into the question, I just want to recap what disability insurance is if you aren’t familiar with it. Simply put, disability insurance is a policy you purchase that will supplement your income in the event of a disability that keeps you from working. This insurance is meant to allow you to keep a stream of income to help you stay on top of your finances if you will be out of work for an extended period of time.
An Example of How Much it Can Benefit You
If you’re 35 years old, earning $50,000 per year, and become disabled for the rest of your life, you’ll be missing out on around $1.5 million in income between age 35 to 65. And this doesn’t even take into account raises, promotions, or benefits that you may have earned over this period. So, an average person could be putting a couple million dollars or more at risk by not carrying disability insurance. When you think of it that way, it is kind of scary, isn’t it? You may have a $500,000 term life policy to insure against your death, but you may be neglecting even more by not protecting against a disability.
When Disability Insurance is a Good Idea
Do you earn income? If so, buying disability insurance is probably a smart thing to do. You’re far more likely to become disabled for six months or more during your working years than to die. In fact, even at age 30, you have a 1 in 5 chance of becoming disabled for a year or more. Even one year without income could be devastating to your finances. At best, you may have to deplete your emergency savings. At worst, you won’t have enough saved up to cover all of your expenses during this time and have to resort to taking on expensive debt. In some cases, a long-term disability can force people into bankruptcy.
When Disability Insurance Not Such a Good Idea
Even though you can clearly see the benefits of protecting your income against a disability, it isn’t for everyone. For example, if you’re married and both of you work, you could be in a situation where two incomes aren’t a necessity to pay the bills. You or your spouse may be working part-time just for extra money, or otherwise still be able to get by without both incomes. In a case like this, it might not make sense to pay disability insurance premiums on both parties, so money could be saved by only covering one of you.
One of the biggest hurdles is that disability insurance is another premium to pay, and if money is tight, this is almost always out of the question. If you can hardly keep up with your minimum payments and monthly bills, buying disability insurance may do more harm than good. Think of it this way: if you can hardly keep up now, with full income, even if you have disability insurance, at best you’ll still be treading water, and more likely, only earn a portion of your income from a claim, and end up heading for bankruptcy regardless.
It isn’t a fun topic to discuss, but it is real. Disability is the number one cause of home foreclosure and bankruptcy. You need to protect against it if you can, but if your finances are already in disarray, you need to get that house in order before you can take on another monthly payment to obtain insurance.
What About Social Security Disability?
Good luck. Social security benefits are hard to qualify for, and even if you do, the amount you receive is very low relative to what your pre-disability income was. I’ve written about how hard it is to qualify for, and receive Social Security disability benefits in the past. So, don’t count on it, and view any benefits you receive from Social Security as a bonus.
How to Obtain Disability Insurance
First, you should check with your employer. If you’re a full-time employee with benefits, there is a good chance that you receive some sort of disability insurance. In some cases, your employer will pay for a short or long-term disability policy automatically, and in other cases, you may have the option to purchase additional insurance through their group plan. Obtaining coverage through a group plan will almost always be cheaper than going out and buying coverage on your own, so check there first.
If your employer doesn’t offer coverage, then you’re going to be on your own to find a policy. Shopping for any insurance policy requires some homework since there are a lot of shady sales reps and companies that may appear to offer low-cost coverage. Many of the large insurers will offer disability, or work with a company that does. Check with your current insurance companies, whether it is homeowners, life, or otherwise and see what they provide.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.