Disability Insurance: Is It Really Worth It?

A severe injury or a chronic medical condition can be devastating physically, mentally and financially. Besides the expense of treatment, many people who are dealing with medical issues and are unable to work, find that the loss of income makes a bad situation even worse. But there is a way to protect yourself from loss of income due to an inability to work: disability insurance.

What is Disability Insurance?

Disability insurance helps you and your family financially if you become disabled and are unable to work. A disability insurance policy offers the protection of knowing that you will continue to receive a percentage of your pre-tax income each month to help cover your mortgages, bills and other living expenses. There are several types of disability insurances including those provided by the government, your employer and private policies. 

What Are the Different Types of Disability Insurance? 

Disability insurance can be broken into two broad categories: short-term and long-term coverage. 

• Short-term disability insurance policies are meant to help when you are unable to work due to becoming temporarily disabled. Short-term disability insurance usually lasts between three and six months depending on the policy with a waiting period of a few weeks before benefits start. Many employees offer short-term disability insurance as part of a benefits package, but private short-term disability plans are also available. 
• Long-term disability insurance policies last for years, not months like short-term policies, but have a much longer waiting period. Some long-term policies force people to wait months or even years before they see a dime. It is not unheard of for companies to offer long-term disability insurance plans to their employees as part of their benefits, but the majority of people with long-term disability insurance coverage need to purchase policies on their own. The government also provides long-term disability coverage with smaller benefits for those who qualify.

Is Purchasing a Private Disability Insurance Policy Worth the Cost? 

Private disability insurance is expensive. Both long-term and short policy premiums generally cost between three to five percent of the policy holder's yearly salary. That is a lot of money to pay for coverage which you will hopefully never need. But the fact is that people do experience career-ending medical conditions. In fact, according to a Social Security Administration study, a person who was 20 years old in 2011 has almost a one in three chance of becoming disabled for at least six months before retiring.¹ 

The looming question for many people is when does the cost of disability insurance make sense and when is it a better financial decision to not buy it. Most financial experts will suggest that disability insurance is a good idea for people who:

• Are high earners and the sole breadwinner for their family.
• Are young with decades of earning potential in front of them.
• Work in an industry with a high risk of injuries.

On the other hand, people who fall into these categories probably should think twice before purchasing disability insurance:

• Low-income earners,
• Those over the age of 55, or
• People whose spouse or significant other is a high earner. 

Choose the Right Disability Insurance Policy for You

If you determine that a disability insurance policy is right for you, make sure you pick the right one. Look for a policy which offers:

A non-cancellable guaranteed renewable policy to avoid having your insurer cancel your policy even if you pay your premiums on time,

• "First payer" status to ensure the insurer pays you the full benefits although you have additional income.
• A reasonable waiting period before coverage begins to avoid having to having to go for months or years without benefits.
• Coverage if you are unable to continue your current profession even if you may be able to find work in a job paying less. 

^{1. www.nytimes.com/2012/10/20/your-money/life-and-disability-insurance/determining-if-disability-insurance-is-necessary.html}

_{This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.}