Why You Need Disability Insurance

I have been thinking a lot about our financial future and where we are headed. When your looking that far ahead though, you’re assuming that you are going to continue to generate an income. Well, what if that income stops from a disability? Wouldn’t that ruin your financial plans in you didn’t have an income? It sure would!

Over the last few days, I have been checking around about disability insurance. What is disability insurance you ask? Disability insurance helps replace a portion of your income when you cannot work because of illness or injury. If you have an emergency fund built up, you really only need long-term disability insurance. Long-term disability insurance usually only kicks in after you have been disable for at least a few weeks.

Many people argue that having disability insurance is more important than life insurance. The main reason for this argument is that for a 30 year old male, you are 4 times more likely to become disabled than die. It was that staggering statistic that got my attention. I already have life insurance, but not disability insurance. So, I guess it’s time to buy. During my research, I came across a few things that everyone needs to know when purchasing a disability policy. Here they are:

Waiting Period

The waiting period is from the time you become disability to the time the policy starts paying. Most policies have a 30, 60, or 90 day waiting period. In other words, the insurance company wants to make sure it’s a long-term disability before they start paying. Like I mentioned before, it’s crucial to have an emergency fund to cover the waiting period.

Also, the longer your waiting period, the cheaper the policy. It’s been said before that a 1 year disability with a 7 day waiting period costs more yearly than a 30 year policy with a 90 day waiting period. Weird huh?

Benefit Period

The benefit period is the maximum time that benefits will be paid. Obviously, the insurance company will only pay while you are disabled. So, if you recover 6 months after, the benefits will stop. But what if you are permanently disabled with no chance of recovery? That’s were the benefit period is crucial.  You can get almost any term policy but the most popular is probably the “to age 65″ policy. As you can guess, it will continue to pay until you are age 65 so long as you are still disabled.

Type of Disability

This is an area where you need to read the fine print. There are basically two ways a disability policy can be written. It can be written as an “own-occupation” or “any occupation” policy.

An own-occupation policy states that it will pay benefits if you can no longer perform the occupation you were doing when you were disabled. So, if you were a fireman and were disabled on the job, the policy will pay so long as you can’t perform your old duties.

An any occupation policy states that it will pay benefits only when you cannot perform any occupation. So for the same fireman example, if you can still sit in a wheelchair behind a desk, the policy will not pay.

As you can see, it’s more beneficial to get an “own-occupation” policy as it will cover you a lot better. It does come with a price though!

Riders

There are a couple riders out there that are important. The first rider is the cost-of-living (COL) rider. The COL rider will increase your benefit each year to keep up with inflation. It’s important because obviously $1 today isn’t going to buy the same stuff 30 years from now.

The other rider to think about is the Social Security rider. A social security rider will allow you to increase your benefit should you be turned down for Social Security disability (as 70% of people are). When most people think about their needs for disability insurance, they assume they will get something from Social Security. This rider protects you just in case you are denied!

OK, Now How Much Does It Cost?

Disability insurance is just like any other insurance. The company rates you on the amount of risk they take. So, if you have a higher chance of a claim, the policy will cost more. For example, if you work around heavy machinery every day, you are more likely to become injured than say someone like myself who sits at a desk. That’s just the way the cookie crumbles.

For me, a policy with a 90 day elimination period that would pay until I am 65 (I’m 26 now) costs $375 a year. I was really surprised at that number and I thought it would be WAY higher. I also only looked in once place (Zander Insurance) so I could possibly find it cheaper somewhere else.

Where Can I Buy It?

Well, the first place to look is your employer. Many places offer long-term disability through work and it’s cheaper due to group rates.

If your work doesn’t have a policy (like my work), you need to find yourself a good independent insurance agent. These are the people that don’t just work for one company. They can shop around and get you the best rate.

So, what are you waiting on? You shouldn’t be going another day without disability insurance!

Comments

  1. When I was pregnant with twins I needed to go on bedrest at 25 weeks due to preterm labor. Disability covered me until I had my twins at 40 weeks and then I went on maternity. I was so grateful to have that resource to count on! It eased my mind during that very stressful time.

  2. This post is so true!!!! I had disability insurance at work, both short and long term. I used the short term x2 and I am now on long term due to a serious surgical repair to a tendon. I have been off work since Nov 9th. That money became even more important as I could not return to work after the 12 week family leave and was terminated. The policy continues to pay as long as I am disabled. The reimbursement is 50% of gross pay and it is a blessing. Take it from a real life example, do not go another day without disability insurance!!!!!

  3. I agree! I became disabled (permanently) and had no disability insurance. Now I collect SSD, but if I was single, I have no idea how I’d make it on that payment.

  4. Remember that the more debt free you are, the less you will need. So don’t pay for more than you need. And get your debt paid down!

    And once you are debt free including the mortgage, with emergency funds and money tucked away, you probably won’t need it at all. :) I don’t have it anymore (age 56) as I only need under $500/month to get along – and the investments will do that easily until SS and SSD would kick in.

  5. I have short term diability (2 weeks – 6 months) and long term disability (6 months – normal retirement age…currently 69 1/2) through my job.

    It costs a total of $263.64 a year – $4.73 biweekly and $5.41 biweekly respectively…that’s a small price to pay to know that if I cannot work, we’ll at least get 2/3 of my paycheck tax free for as long as I’m out or until I’m almost 70.

    I highly recommend that peace of mind.

  6. The prices people are citing seem really inexpensive to me. Perhaps things are different in Canada? I truly value this type of insurance (even though it costs me a small fortune-about $200/month) because I work with people every day who are injured and their lives are in shambles due to financial woes. Imagine trying to focus on your rehabilitation when you aren’t sure you’ll have a roof over your head? Tough stuff.

  7. Adam,
    While I agree with you that it is important for people to plan ahead in case of a disability, encouraging people to buy disability insurance with so little information is a mistake. Insurance companies are ultimately out to make a profit and they don’t usually pay benefits without a fight. See my post http://musingsofasinglegal.blogspot.com/2010/02/you-cant-beat-system.html about frustrations with insurance. I’m not saying people shouldn’t purchase disability insurance (or participate in their employer sponsored plan) but there are some other important considerations you left out. You may be better off socking away a lot of money into a low-risk investment and increasing your emergency fund.
    1.) Just because you have disability insurance does not mean you will actually receive benefits if you become disabled. This is especially true if your disability stems from a condition that is harder to prove (ie. Chronic Fatigue Syndrome or Fibromyalgia). It is also incredibly difficult to prove disability if you have a sedentary occupation – hard to show that you are unable to sit for 8 hours a day.
    2.) Many policies have exclusions or limitations for certain types of conditions (like mental illnesses).
    3.) Many policies will reduce the amount of benefits you receive by Social Security (including dependent SS benefits).
    4.) If you are approved for benefits, this does not mean your benefits will continue without interruption. The insurance company could terminate you after a period of time.
    5.) While you can appeal a decision an insurance company makes (and ultimately pursue litigation) this increases the amount of time you are without benefits. It is important to have substantial savings to tide you over in the event this happens.
    6.) Insurance companies will resort to surveillance and other methods in order to terminate or deny your benefits. Good Morning America recently ran a series on Hartford’s use of surveillance of a woman eating a chip to terminate her benefits.
    7.) Many policies (in states that have not outlawed it) have discretionary authority which makes it incredibly difficult for a court to overturn the insurance companies decision.

    This is just a brief overview of some of the problems. If you are considering insurance I recommend doing research on ERISA law and the insurers track record.

  8. @Emily: You bring up good points. In fact, my mom suffered an aneurysm and stroke at 53, a year before she passed away, and was declared “totally and permanently” disabled by three physicians (primary, neurosurgeon and rehabilitiation doctor). We still had to submit countless claims, forms, etc. and wait the six-month waiting period (she only had long-term disability).

    However (and this will make me sound like the devil’s advocate), there is a lot of fraud in the disability insurance world, so companies must do their due dilligence to only pay benefits to those who really need them. That said, it does seem as though there is little regard for non-physical, or non-obvious, I should say, disabilities such as mental conditions and other illnesses.

    Oh, and #3 you listed above was a real kicker for me. When Mom was FINALLY approved for SSI disability, her insurance benefit was slashed by the same amount, effectively canceling the SSI benefit.

  9. @Adam: Right, I realize there is some fraud in the insurance world. But at times there is also fraud on the part of the insurer trying to wean somebody off of benefits. I work for an ERISA litigation firm. The firm represents people who have been denied benefits (whether health insurance or disability insurance benefits, among others). It is disheartening to see the tricks insurance companies play on people who truly are disabled and whose doctors are unequivocal in their support of disability
    I’m young (24) and I recognize that were I to become disabled in the next few years because of some unfortunate circumstance there is no way I would have enough money in the bank or investments to carry me through the rest of my life. Despite this knowledge, I’m still grappling with the question of whether buying disability insurance is worth it. My personal thoughts for now (independent of my ultimate decision on whether to buy insurance) is that it never makes sense to just rely on disability insurance or SS (or even both). Whatever I decide to do I think I will try to put an action plan in place that has a diverse set of options to carry me through in the event that one option (ie. insurance benefits) doesn’t pan out. That, of course, is somewhat easier said than done.

  10. I agree with Emily. I seriously researched disability insurance a few years ago. I wound up not buying any. It would have been about 350/month for what I would call a “Cadillac” plan from a company that was top-notch. The problem is that my work is sedentary (computer stuff) so the risk of my becoming disabled enough not to do my work was relatively small.

  11. As Emily noted, you’ll probably have to fight any insurance company in court to get disability benefits paid.

    The NY Times has had recent columns on disability insurance, with one commenter noting you’ll easily spend a couple hundred hours of attorney time on getting disability benefits.

  12. My company offers disability coverage for its employees. Fortunate for me, I haven’t had to use it but I do know of a younger employee who did. I will certainly raise more questions about the benefits for our current policy. Too, for future reference, I will definitely keep in mind the difference between the “own” and “any” since that certainly makes a big difference.

  13. We don’t have disability insurance due to the over $465/month it would cost my husband and that would be for the crappy type insurance! His job is physical and around heavy equipment and poisonous fumes. We can’t afford it and his employer doesn’t pay it. Watching the news we know that you don’t get anything from workman’s compensation either! For those that say what if the worst happens? Well, I guess first to go would be the RRSPs and then the house.

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