Disability insurance: Is it worth it?

Disability insurance is designed to protect that income if an injury or illness prevents you from working. But is it worth the cost? The short answer is yes, for most people, it’s an essential safety net. Let’s delve into why disability insurance is worth considering, what it covers, and how to choose the right policy.

What Is Disability Insurance?

Disability insurance provides a portion of your income if you’re unable to work due to a disability caused by an illness or injury. Typically, it replaces 50% to 70% of your salary, helping you manage everyday expenses like rent, groceries, and utilities during recovery. There are two main types: short-term and long-term disability insurance. Short-term policies usually cover a few months, while long-term policies can extend for years or even until retirement, depending on the plan.

Why Is Disability Insurance Important?

1. Your Income Is Your Most Valuable Asset

For most people, the ability to earn a paycheck is their greatest financial asset. If you’re unable to work, your income stops, but your bills don’t. Disability insurance ensures that you can maintain your lifestyle and cover essential expenses without depleting your savings or going into debt.

2. High Risk of Disability

Many underestimate the likelihood of becoming disabled. According to the Social Security Administration, more than one in four 20-year-olds will experience a disability before they retire. Disabilities aren’t always the result of accidents; illnesses like cancer, heart disease, or mental health conditions are common causes.

3. Employer Coverage May Not Be Enough

While some employers offer disability insurance, these policies often cover only a fraction of your salary and may have limited benefits. Additionally, if you leave your job, you lose the coverage. Having a personal disability policy ensures continuous protection.

Cost of Disability Insurance: Is It Affordable?

Disability insurance premiums typically range from 1% to 3% of your annual income. For example, if you earn $60,000 a year, your premiums might be $600 to $1,800 annually. The cost depends on factors like age, occupation, health, and the policy’s benefit amount and duration. While this might seem like an additional expense, it’s a small price to pay compared to the financial impact of losing your income for months or years.

Key Features to Consider

1. Benefit Amount: Choose a policy that replaces at least 60% of your income.

2. Waiting Period: This is the time between when a disability occurs and when benefits begin. Common waiting periods are 30, 60, or 90 days. A longer waiting period can lower premiums.

3. Benefit Duration: Opt for a policy that covers you until at least age 65 if possible, especially for long-term disability insurance.

4. Definition of Disability: Some policies pay out only if you cannot work any job, while others cover you if you can’t work your specific job. The latter, known as own-occupation coverage, is more comprehensive.

Common Misconceptions

1. “I’m Young and Healthy—I Don’t Need It.”

Disabilities can happen to anyone, regardless of age or health. In fact, younger people often face higher risks from accidents and unexpected illnesses. Getting a policy when you’re young can lock in lower premiums.

2. “Workers’ Compensation Will Cover Me.”

Workers’ comp only covers injuries that occur at work, which account for a small percentage of disabilities. Most disabilities are caused by illnesses or accidents outside of work.

3. “Social Security Disability Benefits Are Enough.”

Social Security Disability Insurance (SSDI) benefits are hard to qualify for and often provide a limited amount. The average SSDI payment is about $1,200 per month—far less than most people need to maintain their lifestyle.

When Is Disability Insurance Not Worth It?

While disability insurance is a smart move for most people, there are a few exceptions:

Significant Savings: If you have enough savings to cover your expenses for several years, you might opt-out.

Multiple Income Sources: Those with diversified income streams may find it less essential.

Close to Retirement: If you’re nearing retirement and can rely on retirement savings, disability insurance might not be necessary.

Conclusion: A Safety Net Worth Having

Disability insurance may seem like an extra cost, but it’s a valuable investment in your financial security. Protecting your ability to earn an income ensures that an unexpected disability doesn’t derail your financial future. For most people, the peace of mind it offers makes it well worth the cost.