Rule number-one of income protection is this: If your livelihood depends on earning a regular paycheck, you need disability insurance.
- You need it because about one in every five people incurs a disability during their working lives that disrupts their income.
- You need it because going without a paycheck for any period of time can be financially devastating and lead to bankruptcy.
- You need it because most illnesses and injuries that prevent people from working happen outside the workplace, which means they’re not covered by workers' compensation.
- And, lastly, you need disability insurance even if your significant other (SO) already has it.
If you both earn an income, you both should have your own disability insurance policy.
Even if your SO earns significantly more than you, it’s recommended that you have disability insurance. After all, it’s likely that your lifestyle and budget are based on both incomes. Therefore, losing one source of income, even if it’s the smaller one, can cause a budgetary hit to your household.
What if I work but we only live on my partner's income?
It’s rare for couples to live below their means on just one income while saving the other for long term goals like buying a house or retirement. But it’s not unheard of.
If this describes you, first of all, congratulations on making a smart, sacrificial financial decision. Secondly, there isn’t a right or wrong answer on whether you both should have disability insurance policies.
On the one hand, if you’re living comfortably on one income anyway, chances are that you can continue to do so if you become disabled.
On the other hand:
- Insuring your lost income means you can continue part of your savings plan with minimal interruption in the event you become disabled.
- Even if you don’t need the protection for living expenses, the benefit may come in handy if a disability requires extra money spent on care and recovery.
- Say your spouse who has disability coverage loses their job. During their unemployment, you become disabled (granted the odds of both happening concurrently are slim). In this scenario, you and your spouse have gone from two incomes to zero. Had both of you had disability insurance, the policy would replace some of your income until life returns to normal.
When do I not need disability insurance?
If you work part-time or have a side hustle that only serves to provide a little pocket money, then you can probably do without disability insurance. In this scenario, the amount you might receive in benefits doesn’t justify the cost of disability insurance.
The main question to ask is: Would losing most or all of my income due to a disability bring financial harm to my family or household? The keyword here is harm. If the financial impact is merely an inconvenience, then you can probably forgo disability insurance.
What if I don’t earn any income at all?
If you’re a homemaker or stay-at-home parent who has no outside income, you are not eligible for a personal disability insurance plan from a private insurer. That's because when you buy disability insurance, you’re getting protection against lost income. You’re not paying for a policy that specifically covers the cost of care and recovery related to an injury or illness. (If you do earn an income and have disability insurance, you can choose to use any benefits you receive to help pay for these things; it's just not required.)
This can be challenging because homemakers perform a valuable service. Your responsibilities, such as child care, may need to be outsourced if you are sick or injured seriously enough. This means paying somebody to do what you do for free, which can negatively impact your family’s budget and lifestyle.
The best solution is to establish an emergency fund. You can access an emergency fund to cover temporary child care and other tasks in the event you are unable to.
What if one of us can’t get disability insurance?
In addition to not earning income, there are other reasons you may have difficulty getting disability insurance. You may not qualify for health reasons. Your profession may be considered too risky for an insurance company to cover you.
If you find yourself unable to qualify for an individual disability insurance policy, here are a few ways you can still protect yourself:
As mentioned above, make sure you have an adequate emergency fund in the event you can’t work. Financial experts suggest that your emergency fund should hold an amount equivalent to at least three months of take-home pay. Another rule of thumb is to have enough to cover essential expenses for three to six months in the event you have no income.
Investigate options for group disability insurance that are guaranteed issue. This means you qualify just by applying. If you’re employed full-time, many employers offer group disability to their workforce. If not, many organizations, like professional associations, extend group disability coverage to their members.
Consider critical illness insurance and long term care insurance. Even if you can’t protect yourself against lost income, you may want to have insurance against other financial effects of serious disabilities. While they are not the same as disability insurance, critical care insurance and long term care insurance can provide some peace of mind.
Critical illness insurance covers the expenses you may incur due to a serious illness or to help you pay your bills while ill. The policy will pay out benefits in a single lump sum. It typically covers a few conditions, and those are usually limited to acute illness, not chronic diseases. The primary illnesses you’re insured against include cancer, heart attack, and stroke. Some policies may also include coverage for organ transplants, kidney failure, or paralysis.
Long term care insurance covers much of the costs of nursing homes, assisted living facilities or in-home care. If you become unable to care for yourself, an LTC insurance policy will provide contracted benefits to help you pay for professional care.
Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.
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