There’s a good chance you’ve been approached by a life insurance agent who talked with you about providing for your family financially when you die. But how many times have you been contacted by an insurance agent that wanted to speak with you about disability insurance and replacing your income while you’re alive?
In this article, we’ll look at what life insurance and disability insurance cover, how much each costs, the best time to buy coverage, and more. Let’s start by brushing up on how each of these financial products works.
Life insurance is a contractual agreement between you and the insurance company that if you die, your beneficiaries will receive a death benefit paid by the insurance company, as long as your premiums are paid current and your death was in accordance with the terms of the policy. Regardless of what type of life insurance you buy (term, whole life, universal life, etc.), the death benefit is tax-free to your family, and they can use it in any manner they’d like.
Disability insurance is also a contractual agreement between you and an insurer. If you meet your policy’s definition of “disabled,” you will receive a percentage of your income (usually up to 60%) for as long as you’re within the benefit period you selected. Both long-term disability and short-term disability policies will cover you for income lost due to illness or injury.
Owning a life insurance policy to protect your family financially in the event of your death is an unselfish act of love. Instead of having your bank account debited each month to pay your life insurance premium, you can probably think of a dozen better uses for that money. But you’re putting your family above yourself when you pay your monthly premium.
You’re irreplaceable to your family, but if you contribute any amount of income that helps your family’s needs to be met, that income does need to be replaced. In addition to replacing your paycheck, life insurance provides a tax-free lump sum of money to pay for any expenses, including:
- Housing costs, including paying off a mortgage or paying rent
- Outstanding debts, like student loans, credit cards, or car payments
- Existing or future college education costs for your children
- Everyday expenses – including food, transportation, and healthcare
If you’re a two-income family, could your spouse make up the difference if your paycheck disappeared? If you’re a single parent, could your children support themselves? The right amount of life insurance ensures that life will go on as you want it to for your family.
Learn More: How Much Life Insurance Do I Need?
Imagine that you’ve died unexpectedly and your family has to move out of their home because they can’t afford the monthly payment, your kids won’t be able to go to the college of their choice and build their future, and the refrigerator is just about empty. Can you think of anything worse?
There is one other scenario that is worse than this. Imagine that you didn’t die and have all of these terrible things happen to your loved ones, but imagine that you were alive and laid up for years because you were disabled and couldn’t work, and you had to sit by idly and watch life unravel for your family.
Disability insurance makes sure that families don’t needlessly suffer when a breadwinner gets sick or injured, and they can’t work and receive the paycheck everyone depends on.
You’ve probably noticed the similarities between life insurance and disability insurance: they keep your income arriving when you can’t. The big difference between the two is that with disability insurance, you’re alive to see the benefit paid, whereas, with life insurance, you’re not.
In a word, absolutely. Regardless of why your paycheck has stopped coming — death or disability — the fact remains that the bills will keep coming. Protecting your income with only one of these would be like buying auto insurance that pays your claim when your car is stolen and never recovered but didn’t cover the engine if you had an accident.
One is not a substitution for the other. Different events trigger payment by the insurer —death or disability.
There is one exception. Some life insurance policies will allow you to add a “disability income rider,” which will replace a portion of your income if you become disabled. However, the benefit amount and length of time it’s paid to you fall far short of a stand-alone long-term disability policy.
There is also a “disability waiver of premium rider,” which waives your responsibility to pay your premium when you become disabled; the insurance company will have you resume payments when your disability ends.
The best time to buy both life and disability insurance is right now — while you’re still insurable and because the cost of coverage increases as you age. No one knows what tomorrow may bring; good things take time to develop, but bad things usually happen quickly. Why take the chance of putting your family’s future in jeopardy when you don’t have to?
And both types of insurance are affordable. Term life insurance policies are available for less than $100 per month, depending upon your age and gender. Disability insurance policy premiums average 1-3% of your annual income, which you wouldn’t regret paying if the insurance company was paying you 60% of your income as a policy benefit.
If you apply for life insurance and disability insurance simultaneously, you can use the lab results from your medical exam for both insurance applications (if an exam is required).
Anyone who has ever been the beneficiary of a life insurance policy or received a disability income benefit will tell you that the monthly premiums they paid were well worth it. It’s the benefit that ultimately matters, not the cost.
Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.
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