Should I Have Disability Insurance? Assessing Your Need

An individual’s ability to earn an income is often their most valuable financial asset. Protecting this earning capacity is an important aspect of comprehensive financial planning, yet it is frequently overlooked. Disability insurance serves as a safeguard against the financial consequences of an unexpected illness or injury that prevents someone from working. This coverage ensures a continued income stream, providing stability when an individual’s primary financial resource is compromised.

Understanding Disability Insurance

Disability insurance provides income if a policyholder is prevented from working due to a disability. These events can stem from physical or mental illnesses or injuries, potentially disrupting a job for weeks or years. Policies typically replace a percentage of pre-disability income, commonly between 60% and 80%.

Two main types of disability insurance exist: Short-Term Disability (STD) and Long-Term Disability (LTD). STD coverage is for temporary disabilities, replacing a portion of income for a short duration, typically three to six months, and rarely extending beyond a year. Common sources for STD include employer-provided benefits or state-mandated programs.

Long-Term Disability (LTD) insurance covers extended periods of income loss, with benefit periods ranging from several years to retirement age (e.g., age 65 or 67), or even for a lifetime. LTD policies are important for protecting against prolonged income loss, replacing a percentage of income, often between 50% and 67% for individual policies.

Disability insurance differs from other forms of coverage. Unlike workers’ compensation, which covers work-related injuries and illnesses, disability insurance provides benefits for non-work-related conditions. Health insurance primarily covers medical costs, whereas disability insurance focuses on replacing lost income.

Assessing Your Need for Coverage

A disability can have significant financial implications. Without a steady paycheck, individuals may struggle to meet ongoing financial obligations, including living expenses like mortgage or rent payments, utilities, and food.

Beyond daily living costs, a disability can lead to increased medical or care-related expenses. Even with health insurance, out-of-pocket costs such as co-pays, deductibles, and services not fully covered can accumulate rapidly. Households with a disabled adult may require more income to maintain a comparable standard of living.

Evaluating existing financial safety nets is an important step. Emergency savings are a first line of defense, but these funds are often quickly depleted during an extended period without income. A 2024 study indicated that nearly half of those without disability insurance would tap into personal savings to cover day-to-day expenses during a disability.

Employer-provided disability benefits should also be reviewed, as their limitations might not provide sufficient protection. Group long-term disability plans typically replace a percentage of income, often 60%, and may have caps on the maximum benefit. Spousal or other household income sources can offer some support, but relying solely on these may place an undue burden on other family members.

Government benefits, such as Social Security Disability Insurance (SSDI), are available but come with strict eligibility requirements and long waiting periods. To be eligible for SSDI, an individual must have a medical condition expected to last at least one year or result in death, and it must prevent them from performing any substantial work.

Even a temporary loss of income can be financially difficult for many, particularly those with limited savings or who are primary breadwinners. Disability insurance is advisable for individuals who rely on their income to cover essential expenses, have limited emergency savings, work in physically demanding occupations, or are self-employed.

Key Policy Features to Consider

Understanding the key components of a disability insurance policy is important for prospective buyers.

Definition of Disability

The definition of disability within a policy is a key consideration. “Own Occupation” and “Any Occupation” are the two main definitions. An “Own Occupation” policy pays benefits if you cannot perform the main duties of your specific job. This definition is generally more favorable, especially for those in specialized fields. In contrast, an “Any Occupation” policy only pays benefits if you are unable to perform the duties of any job for which you are reasonably qualified. This definition is more restrictive.

Elimination Period

The elimination period, also known as the waiting period, is the time between the onset of your disability and when benefit payments begin. Common elimination periods range from 30, 60, 90, or 180 days. A longer elimination period generally results in lower premiums because it reduces the insurer’s risk. A 90-day elimination period often provides a balance between cost and coverage.

Benefit Period

The benefit period defines how long benefits will be paid once the elimination period is satisfied. Options commonly range from two, five, or ten years, to age 65, age 67, or even for a lifetime. Longer benefit periods mean higher premiums. Choosing a benefit period that aligns with one’s financial needs until retirement age is often recommended.

Benefit Amount

The benefit amount is typically calculated as a percentage of your pre-disability income. Benefits might be estimated as 70-90% of wages earned in a base period, up to a maximum weekly benefit. Insurers determine the maximum coverage an individual can purchase, which is directly tied to their income.

Policy Riders

Several riders can be added to a policy to enhance its coverage:
A Cost of Living Adjustment (COLA) rider increases benefits periodically to account for inflation.
A Future Increase Option (FIO) or Guaranteed Insurability Rider allows policyholders to increase their coverage in the future without additional medical underwriting.
A Partial Disability Benefit rider provides a reduced benefit if you can work part-time but not full-time.

Renewability Terms

Understanding the policy’s renewability terms is important. A non-cancellable policy guarantees that the insurance company cannot cancel the policy, increase premiums, or reduce benefits as long as premiums are paid on time. A guaranteed renewable policy, while ensuring coverage cannot be canceled, allows the insurer to increase premiums on a class-wide basis.

Obtaining a Disability Insurance Policy

Acquiring a disability insurance policy involves several practical steps. Individuals can purchase policies through an independent insurance agent or broker, which is often recommended as they can compare offerings from multiple carriers. Policies can also be acquired directly from an insurance company or through professional associations or groups.

The application process typically starts with an initial quote. A detailed application form must then be completed, gathering personal, financial, and medical information, including occupation, income history, and existing health conditions. Full disclosure of medical history is important, as omissions could lead to policy cancellation or claim denial.

Underwriting is a process where the insurance company assesses the applicant’s risk. This involves a review of medical history, financial standing, and occupational duties. A medical exam may be required, particularly for higher benefit amounts. Insurers may also request medical records from physicians. The underwriting process can take several weeks.

Several factors influence the premiums charged. These include the applicant’s age, health status, and medical history, with younger and healthier individuals receiving lower rates. Occupation plays a significant role; riskier jobs generally incur higher premiums. The chosen benefit amount, benefit period, and elimination period also directly affect the cost, as do any additional riders. Comparing quotes and policy features from different providers is advisable.