Many people carry homeowners, life, and auto insurance. The three seem to be the “complete” combination of insurance products available. However, just because your insurance agent promotes these three heavily, doesn’t mean you don’t need disability insurance.
In fact, you are more likely to become disabled than to die by the time you reach age 65. So why is it that so many are more focused on life insurance than disability insurance? Disability insurance is vital to your financial grounding and covers a good portion of your income loss if you can’t work anymore.
Should I buy disability insurance through my employer or on my own?
Most of the time, disability insurance is going to be cheaper through your employer. The power of the group that is buying into the disability insurance plan is greater, lowering the cost. If you do choose to go buy through your employer, ask if the premium is taken out pretax or not. If it is taken out pretax, you may have to pay taxes on payouts if you become disabled. Try to avoid this if possible. Even still, employer-based disability insurance is usually more cost effective.
Some people claim that getting a policy through your employer is a bad idea because “you can not take your policy with you.” True, you won’t be able to take your policy with you, but in the event you become self-employed, you can always start up a policy on your own to replace the one you had with your employer.
How long should I be covered by disability insurance?
I recommend long-term disability coverage, at least to age 65 (that is, if you still need an income by then). Short-term policies do not provide you with good value due to their low payouts and trouble with having to renew constantly.
What is an “elimination period?”
Think of your elimination period as a deductible. The longer the elimination period, the less expensive the premium becomes. The elimination period is the length of time during which an insurance company does not have to pay you for an injury starting after you are diagnosed by the medical community.
A typical elimination period is 90 days. You may choose to have a longer or shorter elimination period based on the amount of risk you wish to take.
How much of my income can a policy cover?
A good policy should cover between 60 and 70% of your income. Disability insurance won’t cover 100% of your income due to the fact that it becomes very tempting (for some people) to claim a disability if they could have 100% of their income paid out to them without working.
Don’t let the fact that you won’t be able to make your full income off of disability insurance discourage you from buying it. Many disabled people choose alternative career paths that make them good money, bringing them even more income than when they weren’t disabled.
Any last thoughts?
As with any insurance you purchase, make sure that you are always calculating risk. Try to stay conservative, but don’t be so conservative that all of your income is going towards ridiculously priced premiums.
Long-term disability insurance is essential. For short-term disabilities, you can use your emergency fund. Compare employer-based disability insurance to private insurance for yourself. Get a few quotes from several companies. Once you have compared, make a wise decision by weighing risk, benefit, and cost.
Hopefully you’ll never need to use disability insurance. But if you do, you’ll be glad bought it!
“Insurance Essentials: Disability Insurance” is part of a series on Insurance Essentials: An Introduction To Insurance You Need! I encourage you to read more articles on insurance. I’d also appreciate your comments below so that I might improve this article accordingly. Thank you for your help!
! John wrote two articles for the book: "Budgeting for Groceries" and "How Grocery Stores Work."
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