Do I Need Disability Insurance
Most Americans are far better prepared financially to die than they are to become disabled. However, statistically speaking, on average we are three to five times more likely to lose work due to disabilities than death. So, the short answer to this question is “yes!” For financial health and protection, it is important to understand and consider disability insurance.
What is disability insurance and what do I need to know about it?
Disability insurance covers some of your income if you are unable to work due to an illness or injury. There are two broad categories of disability insurance policies: short-term policies and long-term policies. Short-term disability insurance is designed to pay benefits sooner but over a shorter time period than long-term policies, which typically require that you wait longer before benefits start, but pay benefits over a longer period of time.
We generally recommend that you consider long-term policies and self-insure for the short term by having an emergency fund that would cover three to six months of essential living expenses. Once you become disabled, you can apply for benefits but you must wait for a period of time, often weeks or months before your benefits are paid – this is called the elimination period. Long-term policies will cover you for long term disabilities which can seriously threaten your finances and which you cannot otherwise prepare for.
The least costly option for buying disability insurance is through your employer if it is offered. Another typically cost-effective source is through a trade organization if you belong to one. If you take out your own policy, it will stay with your whenever you change jobs, but unless you get it through a trade organization, it will typically be more costly on your own. You can reduce the cost of premiums by having a longer elimination period – which should be covered by your emergency fund as discussed above.
Why do I need disability insurance?
In order to answer this question, the key question to consider: if you were to suddenly become injured or develop a long term illness and were unable to work for weeks, months, or even years, could you still meet your financial obligations?
You may feel that as an office worker, for example, you do not need disability coverage, especially when you compare yourself to a construction worker, who needs a good back for their work. However, we recommend that you still consider the important question above. What if you were to get in an accident and it effected your mind, your ability to sit at a desk, etc.?
Consider the following statistics:
· The Social Security Administration reports that over one in four of today’s 20-year-olds will become disabled before reaching age 67.
· 67% of workers have no long-term disability insurance coverage.
· According to The Federal Home Loan Bank, 48% of mortgage foreclosures are due to disability versus 3% due to death.
Interestingly, according to the Council for Disability Awareness, the most common reasons for long-term disability claims are:
· Musculoskeletal disorders (29%)
· Cancer (15%)
· Pregnancy (9.4%)
· Mental health issues including depression and anxiety (9.1%)
· Injuries such as fractures, sprains, and strains of muscles and ligaments (9%)
As you can see from the list above, long-term disabilities can happen to any of us, which is why we encourage you to strongly consider long-term disability insurance.
What about Social Security Disability Insurance and Worker’s Compensation?
These are two well-known government disability insurance programs. In addition, California has a disability insurance program. However, in general, government programs are designed only to provide limited benefits under restrictive terms and should not be relied on as your main source of income if you are disabled.
For example, there are two big reasons you should not rely on Social Security (SS) disability:
1. It is relatively difficult to qualify, with a strict definition of disability.
a. 60% of initial disability claims are denied.
b. Social Security only provides benefits for total disability, generally meaning the inability to perform any gainful employment.
2. The payout is low. If a claimant is currently working and makes more than $1,220 per month in 2019 ($2,040 for blind applicants), the SSA will deem that individual to be performing substantial gainful activity and not disabled.
Regarding workers’ compensation insurance, benefits under these policies pertain to disabilities incurred on the jog. If, for example, you develop heart disease that prevents you from working, workers’ comp will generally not cover that.
While we cannot address every individual’s particular situation in an article like this, we would be happy to discuss with you your options and make recommendations for your unique situation. Please let us know if we can help.