Is disability insurance worth it? Well, let’s reframe that question slightly.
You buy auto and homeowner’s (or renter’s) insurance because a car, house and all those possessions are worth a ton of money – you don’t want to be on the hook if they’re destroyed. Knowing this, would you want to insure an asset that’s arguably worth several times more than your car, home and everything else you own combined? If your answer is yes, then disability insurance is worth it.
It’s easy to overlook your income as an asset because it isn’t tangible like a car or home, but your lifetime income potential is the most valuable thing you own. Think about the number of years you plan to work then multiply that by your annual salary. That’s a pretty big number, even before factoring in raises, promotions or job changes. Of course, the math adds up so long nothing goes awry, but that doesn’t always happen.
The Social Security Administration estimates that for a 20-year-old today there’s a 1 in 4 chance he or she will be out of work one year or more due to a sickness or injury. Even a temporary disability could have a big impact on your lifetime income potential and, in turn, your financial plan. Think about it this way: If you were in a rocket ship headed for the moon, you’d miss your target by 4,169 miles if your trajectory was a mere one degree off course.
That’s exactly what disability insurance is for. It replaces a chunk of income you would have lost because an injury or illness prevented you from working. Big picture: It’ll help your financial plan stay on target, even if you temporarily get knocked off course a degree or two.
Disability insurance, as you see, forms a foundational piece of a financial plan, which means disability insurance is absolutely worth it. Given that, here’s what you should know about it.
HOW DO I GET DISABILITY INSURANCE?
Good news: If you work full time, there’s a good chance your employer already provides some level of disability insurance coverage. Short- and long-term disability insurance policies through your employer will typically pick up 50 to 60 percent of your salary.
CAN I GET MORE THAN WHAT MY EMPLOYER PROVIDES?
Definitely. You can supplement your employer’s coverage with a private plan. Or if you don’t have coverage through your employer, you can get private disability insurance coverage. You could buy a policy that pays a larger benefit or has coverage that kicks in sooner (known as an elimination period), for example. A private plan also allows you to take your coverage with you throughout your life. If you leave an employer, you typically lose your disability coverage that was provided through the job.
OK, WHAT’S SHORT- AND LONG-TERM DISABILITY INSURANCE?
Short-term disability insurance kicks in when you temporarily can’t work. If you had knee surgery and you’ll need to stay off your feet for several weeks, short-term disability may kick in. You’ll receive a short-term disability benefit for a few weeks or even up to a year, depending on your policy. Some employers require you use all your sick days before you can lean on disability insurance. You might also need to wait about a week or so before your coverage kicks in.
Long-term disability, as its name implies, provides coverage when a sickness or injury prevents you from working for several months, years or the rest of your career. Again, depending on the policy, you’ll receive benefits for a few years or all the way into retirement. The elimination period for a long-term disability insurance policy is lengthier, roughly 90 to 180 days, but it can pick up right where your short-term policy left off.
HOW MUCH DO I NEED?
There’s no hard-and-fast rule about how much disability insurance you need. But it’s typically a good idea to get enough to replace as much of your income as possible. To go back to the initial comparison, what if your house burned down? Would you want a policy that paid you for 50 to 60 percent of the cost to replace it? Or would you want a policy that paid to replace your whole house? If you could use an assist in this area, a financial professional has the tools and training to help you arrive at a solution that matches your goals. He or she can show you how all the pieces of your financial life, including disability insurance, fit together.