Is Disability Insurance Right for You?
Like life insurance, disability insurance can be an uncomfortable topic to discuss. Imagining a situation where we become injured, sick, or otherwise unable to work can be understandably stressful and worrisome.
But we shouldn’t avoid it.
I like facing topics like this head on because they always conjure questions that need answering. And the more answers we have before the unthinkable happens, the more prepared we can be if it ever does.
So, let’s talk about disability insurance! I’m bringing you the answers to some Frequently Asked Questions to help you figure out whether signing up for disability insurance is the right move for you.
What does disability insurance do?
Disability insurance protects you against circumstances that are both unforeseeable and unfortunate.
Consider this scenario: you work your regular job five days a week. Each week, you earn a paycheck that helps you pay your rent or mortgage, keep you and your family fed, and enjoy your favorite entertainment. You get to live your life your way.
The above scenario might sound familiar. But now, imagine the unthinkable: you sustain a serious injury, prolonged illness, or other debilitating medical condition. Your injury or illness prevents you from working. Without your job, you can no longer afford your chosen lifestyle.
But with disability insurance, you can.
Through disability insurance, you can still receive up to 60% of the annual income you received while you were working. It protects you. It protects your family. It even helps you continue to save for retirement without losing precious time.
Disability insurance helps ensure you can afford your life even when you can’t work.
How does disability insurance work?
Disability insurance works in much the same way as most other forms of insurance. After you sign up, you pay a monthly premium. If you become unable to work due to an injury or other condition, you can file a disability claim. Once you gain approval for benefits eligibility and go through a brief waiting period, you can receive benefits as regular monthly payments.
It’s a simple process that all begins with step one: signing up. Your employer might offer a simple sign-up process when you enroll in benefits. You likely pay taxes to the Social Security Administration, which offers its own disability protections. Or, you could find your own private insurance provider.
Is there a difference between short-term and long-term disability insurance?
The short answer: yes, there is.
The long answer: Short-term disability insurance typically only pays benefits for a period of a few months. This can vary by policy, but it’s usually between 3 and 6 months. The waiting period to receive benefits is usually two weeks.
Long-term disability insurance covers years. The minimum is usually 2 years. Some policies allow you to receive monthly benefits for 5 years, 10 years, or straight through to age 65. The waiting period can be several weeks or even months.
When deciding to sign up for disability insurance, consider your savings. If you have enough money stashed away to sustain you for several months, you might not need short-term insurance. But very few of us have enough money saved to sustain our lives for years or even decades. For most of us, long-term disability insurance is a good choice—we just need to find the right provider!
Why choose private disability insurance?
You might have noticed a couple of abbreviations on your paystubs: SSI or SSDI.
Supplemental Security Income (SSI) is funded through both federal and local state programs. Receiving this type of benefit is typically based on a combination of age, disability type, and financial needs.
Social Security Disability Insurance (SSDI) is a benefit that requires a work history where you’ve earned a certain number of work credits. Social Security offers a process for applying for disability benefits online.
While both of these social programs can help in an emergency, qualifying for benefits can be difficult and timely. They might also require a total disability with little to no chance of recovery. Private insurance, however, can offer you more flexibility and greater chances of qualifying for benefits should you need them. The waiting periods for private disability insurance can also be much shorter.
How much disability income will you need?
I love this question. And to answer it, I always recommend the same thing I recommend to those asking how much they should save for retirement: create a budget.
A lifestyle budget.
So, ask yourself: how much money do you need to afford your current lifestyle? This can take some time and research, but I assure you that it’s very worth it. To create a lifestyle budget, it’s helpful to take full account of all lifestyle expenses. Consider costs such as:
- Home and vehicle maintenance
- Hobbies and entertainment
- Family needs
- Medical expenses
Because benefits are paid monthly, I find it most helpful to break these down into monthly costs. That way, I can better understand how much I need per check to comfortably afford my lifestyle.
A financial advisor can offer you a personalized budget and an accurate estimate of how much insurance you might need.
The 50-30-20 budget method
As an extra trick, consider the 50-30-20 budget method. That is, try to find a balance where you break your different types of expenses into different percentages of your income. Specifically, try to divide your income this way:
- 50% Necessities
- 30% Wants/”Fun” expenses
- 20% Savings
This way, you can make sure you can afford the things you need (including your retirement/emergency costs) while still providing room for your hobbies.
What are the odds of needing disability insurance?
Believe it or not, the odds of needing some form of disability insurance are greater than you’d think. 1 in 4 workers experiences some type of disability at some point in their career, with 13% requiring a long-term leave (5 years or more).
The unfortunate reality is that accidents and illnesses can occur at any point to anyone. Having some sort of insurance to safeguard against an unpredictable loss of income can help alleviate unneeded stress during an already difficult time.