Is Disability Insurance Worth It?

The Ins and Outs of Disability Insurance

Worried young woman with broken leg in cast sitting on sofa at home and talking on smart phone
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Nearly 10 million people received Social Security disability benefits in 2019. While it’s something you hope never to need, are you financially prepared to cover your living expenses if a non-work-related injury or sickness prevents you from working? If not, disability insurance is one way you can protect yourself since it pays part of your income. Here’s some more information about it so you can decide if it's right for you. 

Key Takeaways

  • Disability insurance pays part of your income if you become disabled and are unable to work. 
  • There are two main types of disability insurance, short-term and long-term. You can choose one or both of these options. 
  • Many employers offer disability insurance as part of a benefits package. Or, you can opt to purchase an individual or supplemental plan on your own. 

What Is Disability Insurance?

Disability insurance is also known as disability income insurance. That’s because it pays part of your income if you are injured, sick, or unable to work. . 

Disability insurance covers many severe illnesses and injuries. To help you decide if disability insurance is something you should purchase, here’s a look at some of the events it can help you through: 

  • Pregnancy 
  • Cancer
  • Mental health challenges
  • Hernias
  • Broken bones
  • Musculoskeletal disorders

The exact terms of your contract vary depending on the policy you select, but many policies allow you to protect up to 70% of your monthly income. This means if you normally earn $2,400 a month, your disability insurance could provide up to $1,680 a month in payment. You can use this money any way you’d like. 

After a disabling event, long-term disability insurance won’t kick in until after your elimination period ends, so you might not get payments right after an injury or illness.

Pros and Cons of Disability Insurance 

Pros
  • Protects your income

  • Offers peace of mind 

  • Helps to prevent financial hardship

Cons
  • Individual plans will cost you 

  • May require a medical exam before approval

  • Can have waiting periods in which you receive no benefits

Pros Explained

Protects your income: Disability insurance protects your income so you can continue to pay your bills if you become injured or sick and unable to work.

Offers peace of mind: Knowing you will be able to pay the bills while you are out of work can minimize the stress of the situation  you allow you to fully focus on recovery. 

Helps to prevent financial hardship: Disability insurance can help you avoid going into debt or bankruptcy.

Cons Explained

Individual plans will cost you: Individual disability insurance can often cost between 1% to 4% of your annual income. Disability insurance is often more affordable through a group program. If your employer offers it, you may save money by opting for this coverage vs. buying an individual policy. 

Employer-sponsored short-term disability may replace approximately 80% of your base salary, while long-term employer-sponsored disability usually replaces about 50% to 60%. If that’s not enough, you can consider supplementing coverage with an individual disability policy.

May require a medical exam: You may need to have a paramedical exam, similar to a physical check-up before an insurer approves your disability insurance policy. Depending on your health status, this can add exclusions and limitations to your coverage.

Can have waiting periods in which you receive no benefits: Most disability insurance policies come with an “elimination period.” This is how long you will have to wait from when a qualifying injury or illness happens to when you start receiving payouts. It’s not uncommon for elimination periods to be around 90 days under long-term disability policies. If you don’t have an adequate emergency fund in place, you’ll need a plan to cover your expenses until your policy kicks in.

Is Disability Insurance Important?

While it’s easy to believe you’ll never have a disabling event, statistics tell a different story. The Social Security Administration notes that one in four Americans who are 20 years old will become disabled before reaching retirement age.

It’s a grim picture, but it highlights that if you rely on your income to live, disability insurance might be an essential part of your financial planning. This type of insurance can provide a safety net to cover you and your family after your savings run dry. 

Social Security Disability vs. Private Disability Coverage

If you become disabled and can no longer work, Social Security Disability Insurance (SSDI) may be able to help. This federal program provides a limited amount of money each month to those who are disabled. The average SSDI payment in 2021 is $1,310 a month.

In order to qualify, you must have earned enough work credits, have a recent work history, and have paid into the program. Additionally, you must meet the Disability Determination Services office’s definition of disabled, which states you cannot engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that may result in death or that has lasted or can be expected to last for a continuous period of no less than 12 months. 

If you qualify, it can take time for your claim to get processed; there is also a six-month waiting period before payments kick in. 

If you need more money each month for your living expenses, it might make sense to get private disability coverage, even if you’re eligible for SSDI. 

Workers’ compensation can replace a portion of your income for work-related accidents and injuries. Receiving workers’ compensation payouts may lessen your SSDI benefits (if you’re eligible for both) as the total benefits from both sources cannot surpass 80% of your current earnings.

Short-Term vs. Long-Term Disability Insurance

There are two types of disability insurance, short-term and long-term. Here’s a quick look at the differences between the two. 

  Short-Term Disability Insurance Long-Term Disability Insurance
Typical Benefit Period Typically 3-6 months Up until retirement age
Amount of Coverage Up to 70% of your monthly income 40-70% of your monthly income 
Typical Elimination Period Up to 2 weeks 90 days

Since payments begin quickly, short-term disability insurance can help protect you soon after a disabling event. This can be a good option if you don’t have a lot of sick leave accrued, or if you don’t have an emergency fund in place to cover your expenses during the elimination period. 

With a longer elimination period, long-term disability benefits can start months after a qualifying event. But, this policy can protect you for years, long after your emergency fund runs out. 

Some people have both policies in place. They use the short-term disability payouts to cover their expenses until the elimination period is over on the long-term disability policy. If you go this route, you’ll have to pay for both policies, but you provide maximum protection for yourself and your family. 

Is Disability Insurance Worth It?

If you depend on your income to pay for your living expenses, protecting your income with a disability insurance policy might make sense. 

If you already have a robust emergency fund in place, short-term disability insurance might not be worth it. That’s because you already have a way to cover your expenses for a short period. 

However, your emergency fund won’t last forever. A long-term disability insurance plan can help ensure you have income coming throughout your time under disability. For some people, the peace of mind that comes from knowing they can pay their bills if anything happens to them makes the cost worthwhile. 

Frequently Asked Questions (FAQs) 

Why should a person purchase disability insurance?

A person should purchase disability insurance if they depend on their income to pay their living expenses and don’t have or want to use their savings to replace part of their paycheck after an accident or illness causes them to stop working.

How much do you spend on disability insurance?

If you purchase an individual plan, you should expect to spend between 1% to 4% of your annual income. However, many employers offer this coverage for less–or as part of your compensation and benefits package—so check with your company first.