Should You Buy Disability Insurance?

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, but I can provide some insight as to when it is a good idea 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 maintain 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, having disability insurance is probably a good thing to have. 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 for both of you, 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.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

26 comments
Tim Landry
Tim Landry

I know it is OLD - but I LOVE the fact that our industry uses STD as the abbreviation for Short Term Disability

Michael Relvas
Michael Relvas

To add to Tim's comment. This is also the case in the United States but only in regard to individual Disability insurance. In fact that is one of the things I mention to prospects up front is that both individual Short-Term and Long-Term Disability will NOT cover normal pregnancy.

The only way to have pregnancy covered is with a group STD plan which must be obtained by an employer sponsored plan. The plan does not have to be funded by the employer but does need to be setup through the employer. Additionally, pregnancy will be excluded for the first 9-12 months after the coverage effective date. This is specifically intended to protect insurance companies from this type of risk.

So although it is a very good idea for women to have Disability insurance, it is not quite as simple as Marci makes it sound to actually collect on claims for pregnancy.

Tim Landry
Tim Landry

I do not know about US policies but Canadian contracts all exclude NORMAL pregnancy. Complications ARE covered. We did cover "normal pregnancy" as a disability for a while about 25 years ago - got two reactions from women: "How DARE you consider pregnancy a DISABILITY?" and yours - "Where do I sign - I expect three kids in the next few years - this is a GREAT deal. I will just cancel my policy when the kids are all born" Mostly for that reason we removed the coverage and reverted back to the "complications" version. Doubt we will ever see that come back

Marci
Marci

Disability Insurance is great for working women who want to have a baby. Pregnancy, for legal purposes, is defined as an illness. So one would get supplimental income and the hospital confinement benefit in addition to sick and vacation leave. Therefore, you could actually profit from it.

Tim Landry
Tim Landry

One other thing! This is absolutely the LAST product that you should buy strictly on price. I do not know if it is still available but the cheapest DI policy I have ever heard of cost $18/YEAR - NOTHING is cheaper than THAT - but it only protected you against 6 very specific events (I can only remember 5). It protected you if you were hurt wjile being robbed; it protected you if you were injured on a public thoroughfare; it protected you if you were hurt in a vehicle used for public transit; it protected you if you got hurt in an elevator or an escalatr; and it protected you iif you got hurt in a fire in your home (but do not run out and discover your baby is trapped inside - because if you run back in, you were not covered.If anyone remembers the sixth, please feel free to let me know. Note that ALL injuries only represent approximately 30% of clais and this covered only SOME of them - and NO SICKNESSES. Note also that - at $18/YEAR per policy - this company collected more Disability Insurance premium than the next 6 companies COMBINED

Tim Landry
Tim Landry

Michael - just an aside meaning very little - but your note was written on my brother's 61st birthday

Tim Landry
Tim Landry

Michael you are 250% correct - lol - just want to be stronger than 100%. Frankly my passion for DI is almost entirely because of the weakness of Group - its lack of portability is unbelievably important. My brother was President of Canadian Operations for a sigificant US Company and back then you could not sell Individual to people who had their maximum on Group. So - nothing I could do. The company was sold and the new owner wanted his own guy to run Canada - totally normal - so my brother got the golden handshake and was setting himself up as a self-employed graphic designer working from home with no established income. Therefore (with no income) he could not buy anything then. He had to take his chances. PROSPRCTS PLEASE DO NOT TELL ME THAT YOU ARE HEALTHY AND NOTHING CAN HAPPEN TO YOU. When he poured the last of his tea doown the sink preparatory to getting into his car SO WAS MY BROTHER. He was driving down to Pearson Airport to pick up his daughter when some idiot passed even though there are solid lines saying DO NOT DO THIS. Result A head-on collision with my brother's car at a combined speed of 120 mph (200 kph) UH - CARS ARE NOT DESIGNED FOR THIS. He had a very close meeting with the steering wheel and was basically split in half. It took about 90 minutes to get him out of the car and then he was rushed to one hospital - and then another one because the injuries were too severe for the first. We never expected him to make the weekend - but the doctors pulled a miracle. He has now had seven hip rebuilds and will walk with a cane for the rest of his life. I cried a few years ago when he dropped his cane and danced with his daughter at her wedding - he had beem on the way to pick her up when it happened (Easter weekend 1988). The cane and the hip are a "pain" - the real problem is the Hepatitis C he got fron the blood transfusions wwhich saved his life. The largest market we ignore is those who THINK Group is adequate. We NEVER accept a client having 100% of hs life insurance in the form of Group. PEOPLE - GROUPP LIFE IS CONVERTIBLE - MOST GROUP DI IS NOT! The most important insurance purchase you can make in your LIVES is that small personal DI policy with Guaranteed Insurability. Talk to your advisor and if they say ANYTHING NEGATIVE - INSIST THEY CONTACT ME WITH YOU THERE. My cell number is 514-708-1797

Michael Relvas
Michael Relvas

Tim -

You seem to be very educated on Disability insurance. I guess that's what comes with 40 years of experience. Although I do not have 40 years to back me, I also have taken the challenge of specializing in Disability insurance. It is quite a relief to read something written by someone who actually knows what they are talking about. It is painful to say that somewhere around 85% of the people licensed to sell Disability insurance have no concept of what makes a quality contract consists of.

I wanted to add one thing to an important point you have made a few times, which is that group coverage will often not follow you if your job situation changes. This is particularly important in the current economy. Changes in a person's job circumstances are not always voluntary and we all know that people are losing their jobs and benefits every day. In response to this, I am finding that a lot of people are simply becoming independent contractors while they continue to search for a new job. For someone in this type of situation, group coverage will not do very much. The individual supplemental policy with a Future Increase Option or Guaranteed Increase Option, like Time discussed, certainly will.

It is somewhat painful to be in the insurance business and see how many people believe they are invincible and will remain healthy forever. Disability insurance protects our most valuable asset - the ability to work and earn an income. A 40-year old earning $100K salary who plans to work to age 65 has $2.5 million of income on the line. That's an awfully large amount of money to not properly insure.

John - Finding a good website to shop for Disability insurance is actually fairly difficult. There are a lot of lead vendors out there that will sell your information to random insurance agents. Be careful in who you do business with. It is much more important to find a Disability specialist (preferably a broker) that is actually knowledgeable and able to educate and assist you in obtaining coverage, than it is to try speaking with 10 different agents. Shopping for Disability insurance is not about finding the best price. The true way to shop for Disability insurance is by looking for the strongest contract first and then distinguishing which company can provide it to you at the most competitive price. Here are two sites that may be helpful for starters: www.mrdisabilityquotes.com and www.disabilityquotes.com

You should know that most insurance agents out there do not know very much about Disability insurance. They are licensed to sell it but probably should not be. I speak with people on a daily basis who have been advised to buy a contract that I wouldn't recommend to my worst enemy. Take your time, do your homework and find an actual Disability insurance specialist to speak with.
Being in this field and having my own website, I can honestly say that there are about 4 or 5 sites worth visiting. Most of them are not really helpful.

Tim Landry
Tim Landry

Are you American or Canadian? I do nt know American websites for insurance products. Sorry

John
John

So what's a good website to shop for disability insurance?

Tim Landry
Tim Landry

I guess the best way to answer this question is with another. How important is your income to you? Use any scale you want but the degree of importance you place on your income should be an EXACT match to the degree of importance you place on insuring it. People INSIST on insuring their car - if your car is a total loss and you walk away - compare the cost of a new car to the income you would lose if the YOU were significantly hurt. Vision Care? Give me a BREAK I wear $1,200 glasses and that is NOTHING compared to my income. "I have group insurance!" Fine - but understand what it DOES and just as important DOES NOT DO - for one thing it almost never follows you from one job to the next

Tim Landry
Tim Landry

John - one MAJOR point to support your thinking. What you can probably do - I am not as aware of US rules as I am Canadian - but we CAN do this. Buy a small individual policy (whatever fits your budget) but be ABSOLUTELY SURE TO INCLUDE A GUARANTEED INSURABILITY FEATURE. This does several things - it allows you to increase your coverage as your budget permits - it will USUALLY (Ask about this) provide a special option to replace lost group coverage - should that occur AND IT SHOULD GUARANTEE YOUR ORIGINAL OCCUPATIONAL CLASSIFICATION. Most insurers will offer improved rates and terminolgy to those who have been doing the same or a similar job for 3 years - and better still after 5 years (because job stability is a GOOD THING for insurers to see. By the way, those of you who may have purchased policies prior to attaining that level of experience may ask your current carrier to reconsider your class - which may result in a lower price and/or better conditions. For that improvement on an already existing policy they will probably ask for proof of health - but if you bought a non-cancellable policy they cannot take away what you already have. They can just refuse the improvements. Most of all, almost all of us will become a lower occupational class - higher price and possibly less favourable conditions - if/when we change jobs. AHA But NOT with that Guaranteed nsurability feature. It costs almost NOTHING - and is incredibly powerful. The carrier cannot refuse you - and must offer the same occupational classification - even if you went from a senior executive at a major corporation to being a dancer at a male club in Baghdad - as long as your income justifies it, they MUST accept you

Tim Landry
Tim Landry

Also one of the "features" of a prolonged disability affecting one partner in a relationship is a HUGE amount of stress on the other partner - to the point where it is not at all unusual to see that second partner actually disabled by that stress - so that there are now two disabilities. Again - remember no one expects to be disabled until after the FIRST event occurs. Sure - once you have heart problems, you may suspect that problems will develop - but almost no one expects the first problem - and guys THIS IS PARTICULARLY TRUE OF US. Belief in our invulnerability is a huge part of our male ego

Suzy Orman
Suzy Orman

The time when you least expect is when you might just well need disability insurance. I knew a guy years ago that had lost both his legs in a motorcycle accident, and the fact that he had disability insurance is what saved him from being totally destitute.

Tim Landry
Tim Landry

First of all - I have specialized in Disability Insurance for 40 years - and I have strong personal reasons on top of that for all I am about to say. My brother WAS protected under a Group plan - until the owner sold the company and the new guy wanted someone else in to run Canadian operations. At that time you could not purchase individual insurance if you already had Group. Thank God now you can. Easter weekend 1988 - when he had no DI because his situation was not solid enough yet - he was in a car accident when some idiot just HAD TO PASS even though there were solid line saying NO very loudly. Result - a head on collision with my brother's car at a combined speed of 120 mph. Please - those commercials where a car going 30 mph and hitting a wall show NOTHING of the effects. We were sure he would never survive the weekend. The doctors saved his life. At almost 61 (in exactly two weeks) he has now had seven hip surgeries and will walk with a cane for the rest of his life - BUT THAT IS NOTHING - the blood transfusions which saved his life gave him Hepatitis C. To a few people - NO ONE EXPECTS IT TO HAPPEN. Formerly VERY healthy people are the biggest victims of disability - and one surprising stat - and it does not change much with age - only 30% of disabilities are due to accident - 70% are due to sickness. For young people, the split is 35% accident - 65% sickness, Also - disability is far more certaain than taxes. Everyone reading this - or not reading this - will be disabled before they die. We are only unsure of the timing and the duration - but it WILL happen. Repealing taxes requires an act of Congress, Parliament or whaatever. Repealing disability would LITERALLY require an act of God

Reverse Cell Phones
Reverse Cell Phones

We get disability insurance with our normal benefits package. I wife filed for disability during her 12 week maternity leave. Very helpful.

fern
fern

This topic has frequently been addressed, but nowhere have i read advice for those who already have a preexisting condition that would preclude ever qualifying for disability insurance at reasonable rates.

Having a temporary or longer term disability is not at all as uncommon as people here think. It's easy to feel that nothing can happen to you when you're perfectly healthy, but it happens all the time.

Goran Web | Net Age
Goran Web | Net Age

The time when you least expect is when you might just well need disability insurance. I knew a guy years ago that had lost both his legs in a motorcycle accident, and the fact that he had disability insurance is what saved him from being totally destitute.

Evolution of Wealth
Evolution of Wealth

This is a great basic article. Some of the more imporant points of disability is the definition of disability. Most work policies only cover you in a specific job for two years if at all then if you can work at McDonald's you get no payments. All group pocilies also have pre-existing condition exclusions so that if you change jobs these could come into play.
Another big thing to keep in mind is that if you are disabled you no longer have a 401k/retirement plan to contribute too. How do you offset that?

Holly McKenzie
Holly McKenzie

Thanks for this really great article! I think that it is common to think, "oh nothing will happen to me" but accidents and illness are never planned for. My husband has recently been diagnosed with a disease and has been in and out of the hospital. If he didn't have individual disability insurance, we would probably be losing our house right now!

Jeremy
Jeremy

John, that is an excellent point you bring up. Employer coverage is great, but if you change jobs and your new employer doesn't offer it or you want to go work for yourself, there could be a problem.

And you're exactly right. The older you get, the more expensive it will be and the more likely there could be a preexisting condition that could deny you coverage. This goes for all types of health, disability, or life insurance. The younger and in better health you are when you purchase it, the less it will cost.

So there is no right or wrong answer, but if you are seriously looking for disability coverage it could be beneficial to pick up a supplemental policy while you're young and in good health.

John
John

The way I look at it, it is much more likely that I will get disabled in an accident than die.

Metal Case
Metal Case

I don't see myself paying for disability insurance anytime soon. It is too easy to assume I will always be in good health. It is just too tough to justify another monthly payment that I likely won't see the benefits of.

John
John

Thanks, nice article. I currently have coverage at work, and like you said it is very inexpensive. But recently I've started to think: what if I ever change jobs or start my own business. Then I would need to buy coverage. Wouldn't it be better to get it now, when I am young and healthy? If I wait until I loose my work coverage, maybe I'll have some preexisting condition so that I can't buy coverage in the free market any more. Your thoughts?

Savings Accounts Girl
Savings Accounts Girl

Disability insurance keeps like a good idea - but it's not very common for healthy people to all of a sudden get disabled is it?