Previously, I’ve written about how to determine if you need life insurance or not (and if you do, how much is enough). Another common consideration in the realm of protection planning is disability insurance.
Like life insurance, you may already have some amount of coverage for disability through your employer. If it’s offered as a benefit, you can join your company’s group plan to receive short-term, long-term, or both types of disability insurance for a much lower cost than if you went out to get your own private policy.
But where you might only need life insurance if someone financially depends on you and would suffer a hardship if you passed away, almost everyone with a job needs some form and amount of disability insurance.
Here’s why.
Disability Insurance Can Help Protect Your Most Important Asset
Where life insurance protects people you might leave behind that depend on your income — like a spouse or minor-aged children — disability insurance is designed to protect you from a loss of income.
Your ability to work, earn money, and then leverage those earnings into savings or investments is one of your most valuable assets throughout most of your life. It’s by working and earning an income that most people are able to save for major goals like buying a house or funding an eventual retirement.
Without your income, how would you save money for these important financial needs? That’s where disability insurance comes in, and why it’s so important to have.
And before you think “that’s not something I have to worry about,” consider that 1 in 4 adults aged 20 years old right now will experience a disability before they reach full retirement age of 67. That means you have a 25% chance of becoming disabled in some way.
If you have a job right now, you most likely need some amount of disability insurance to protect against a permanent loss of income before you’ve saved and invested enough to live off a nest egg instead of a paycheck.
The Basic Rundown on How Disability Insurance Works
If you experience a disability that prevents you from continuing to work and have disability insurance, you can file a claim and your policy will pay out a benefit equal to some percentage of your previous income.
Disability insurance doesn’t require you to experience a worst-case scenario before it will kick in. You don’t need to lose a limb or be unable to function in any area of life for benefits to pay out; depending on the policy you have, you could be covered for things ranging from temporary physical ailments to mental illnesses to truly debilitating injuries.
There are two main types of disability insurance coverage: short-term and long-term. Short-term disability insurance tends to cover more of your income if you need to use it (usually around 60 to 70% of your income), but usually only pays out for a few months up to one year… even if you’re still disabled at the end of the time period.
Long-term disability, on the other hand, will replace less of your income (maybe 40 to 60%). But it will also provide coverage until your disability ends or until you reach normal retirement age.
Both types of policies come with waiting periods. With short-term disability policies, you may need to wait around two weeks for your benefits to start paying out. Long-term disability insurance policies usually have a longer waiting or elimination period of about 90 days before paying benefits.
To account for these waiting periods, it’s important that you can self-ensure throughout the period of time you don’t receive benefits. The common rule of thumb for emergency reserves is having 3 to 6 months’ worth of expenses set aside in cash, which you could use until a disability policy kicked in to cover you.
How to Get the Disability Insurance Coverage You Need
Just about anyone with a job who relies on their paycheck as the source for paying expenses and funding savings goals needs some kind of disability insurance policy in place.
The good news is, you might already have coverage through your employer. Short-term and long-term disability insurance policies are commonly-provided company benefits that you should take advantage of if you can.
You can talk to your HR department to determine what coverage you already have. During open enrollment periods, you can make changes and updates to your policies and coverage amounts (or opt in if you weren’t previously using the benefit).
Once you determine what you might already have from an employer, consider talking with a financial planner to see if your existing coverage is sufficient or not. Depending on your needs, tolerance for risk, progress toward financial goals and financial independence, you may not need anything more than what you can access through your employer.
But you may also find you have some gaps in coverage. In that case, a good planner can show you how much additional coverage you might need to fill those gaps (without buying a bigger policy than necessary to help you save on premiums).
They can also suggest the best places to go to get disability insurance if you need it by evaluating your options. That could include your employer if you’re allowed to buy more coverage voluntarily or a professional organization you’re a part of. Planners may also be able to provide you with a referral to a broker they know and trust.
