Any time I blog about insurance, I get the sense that it makes most readers' skins crawl! It's not a fun topic to consider because usually when you're collecting it, something bad has happened – and most people don't like to consider the negatives of life.
But, in order to be the most prepared financially, we have to cover all topics from a personal finance standpoint. So bear with me as we tackle an often confusing, often misunderstood topic – disability insurance.
For those of you who want to stop reading, consider these statistics found on ProtectYourIncome.com:
- Three in 10 workers entering the work force today will become disabled before retiring.
Social Security Administration, Fact Sheet January 31, 2007
- An illness or accident will keep 1 in 5 workers out of work for at least a year before the age of 65.
Life and Health Insurance Foundation for Education, November 2005
- One in 7 workers can expect to be disabled for five years or more before retirement.
“Commissioners Disability Table, 1998,” Health Insurance Association of America, the New York Times, February 2000
- 71% of American employees live from paycheck to paycheck.
American Payroll Association, “Getting Paid in America” Survey, 2008
- Disability causes nearly 50% of all mortgage foreclosures, 2% are caused by death.
Health Affairs, the Policy Journal of the Health Sphere, 2 February 2005
- Close to 90% of disabling accidents and illnesses are not work related.
National Safety Council, Injury Facts 2008 Ed.
What is Disability Insurance?
Disability insurance is one of the most confusing and often overlooked forms of insurance out there. In its simplest form, it offers income replacement to an individual who is unable to work.
So, let's say you were to get sick or hurt for a period of time – disability insurance would pay you a portion of your income while you are unable to work. Long-term disability insurance can cover you for the length of your disability up til age 65 in many cases or for a specified number of years, or until you are able to return to work.
The Social Security Administration estimates in their December 31, 2007 fact sheet that seventy percent of the private sector workforce has no long-term disability insurance. That's a scary thought – that seven out of 10 folks do not have any long-term coverage.
Remember, a person’s ability to earn an income is usually their biggest financial asset, so anyone who depends on earned income should probably consider this type of insurance. For those of you who have people depending on your income, your need for disability insurance is even greater!
How Much Coverage Do You Need?
There is no hard or fast rule that says you need to have a certain amount. Generally though, it's a good idea to get as much as you can afford to buy! Why? Because again, a person's income-earning ability is their greatest asset and so you want to protect that as much as possible!
Before you buy any type of insurance, it's good to ask questions. Here's some things to consider when looking into disability insurance:
- What is your gross income?
- How much are your fixed expenses?
- Should you need this insurance, what types of goals do you still want to save for (i.e. retirement, kid's college etc)?
- Do you have group disability insurance through work?
- How much can you afford?
What Should You Do?
The first thing you'll want to do is check with your current employer to see if you are covered through work. If you are under a group policy through your job, that's a great start! But it doesn't just end there.
Secondly, if you do fall under a group policy, find out if you can increase your coverage. Sometimes you can pay a little extra to get some added benefit, so just do some investigation.
You don't want to just stop with group coverage though because typically these policies will pay roughly 60% of your income on a pre-tax basis.
So, what that means is if you're single and making $60,000 a year or $5,000 per month and you get sick or hurt, your group policy will pay you $3,000 a month. You'll have to back out taxes on that (let's assume an average rate of 20%) – you're looking at a take home pay of $2,400 per month! How much do you think that will affect your budget and your goals?
Next you'll want to shop around to get a quote on individual disability policies to see if it works into your budget and makes sense for you financially.
Lastly, this type of insurance is based mainly on age and health. So don't wait until you get older and unhealthy. Do your homework today! We need to protect against life's storms, and we never know what is lurking around the corner. I know most of us think, “It'll never happen to me” – but we need to be prepared.
What are your thoughts on disability insurance?
- Do you have a disability insurance policy through work or individually?
- Do you think these policies are worth it, and have you had any experience collecting on these policies?