Like anything, disability income insurance has its pros and cons.
Yes, there are a number of reasons why it makes good financial sense to buy a disability insurance policy. But there are also plenty of excuses for not wanting to get this type of coverage. (Some valid, others not so much.)
Let's take a closer look to help you better understand how this type of coverage fits into your financial plan.
Disability insurance protects your greatest asset
You probably have insurance to protect your other assets from loss. Your home. Your car. Your boat or RV. Pricey possessions like jewelry. Some people even have insurance on their pets so they don’t have to choose between the family dog and a costly vet bill.
But none of these is your greatest asset. And ironically, it’s this asset that so many people neglect to insure.
No matter your income level, your greatest asset is the ability to earn a living.
You may not think of your income as an asset, but you should. It makes all the aforementioned possible. Lose your income, even temporarily, and you may potentially have to forfeit the assets you already have insured.
Think of it this way. If you make $75,000 a year and never receive a raise again, your ability to earn an income is worth $375,000 over the next five years. That’s not including benefits that are part of your compensation.
Disability insurance allows you to focus on recovery
Few things hinder recovery more than anxiety about finances. Worrying about how to make up for lost income can actually prolong your illness or injury and make it more difficult to return to work at full strength.
Disability insurance will help you replace your lost income as long as you meet the policy’s definition of disability. That means you won’t have to rush your recovery to return to work against the doctor’s orders.
Disability insurance helps you continue meeting financial obligations
Most of your debts will remain your responsibility if because of a disability you can’t work at all or have to work less.
This is especially true if you own the property that secures a loan, such as your house and car. If you want to continue living in your home and still owe on your mortgage, you must continue making payments or risk foreclosure. Your vehicle can be repossessed if you neglect payments.
For unsecured debt like credit card debt, you still are responsible for repayment. Something that does work in your favor is that many states protect private disability insurance benefits from being seized or garnished by creditors. And the federal Consumer Credit Protection Act protects a portion of your disability payments from collection.
Disability insurance helps you avoid debt, bankruptcy, and other financial emergencies
About 15 percent of bankruptcy filings are caused by an illness or injury to themselves or family members? According to the Council for Disability Awareness, another 20 percent are caused by a lost job and 26 are due to unpaid medical bills.
Without an emergency fund or other assets to fall back on, disabled individuals tend to rely on credit to get by. This usually includes credit cards, but people struggling with day-to-day expenses may also use short-term, high-interest loans.
Also, according to the Federal Home Loan Bank, about 1 of 18 mortgages is not being paid because of a disability to the mortgage holder. In addition, a disability to the mortgage holder is the leading cause of foreclosures, accounting for about 48 percent.
A disability can quickly deplete whatever savings a person has accumulated. Only 40 percent of households have enough cash on hand to last three months or more without income.
Disability insurance provides greater peace of mind
As much as you want to avoid the topic of disability, it’s important to consider how the possibilities would affect others, not just emotionally, but financially as well.
According to the Social Security Administration, more than 25 percent of today’s 20-year-olds will miss at least a year of work because of a disabling condition at some point in their working career. Furthermore, about one in seven people between the ages of 35 and 65 can expect to become disabled for five years or longer.
It’s not just serious accidents that cause disabilities. In fact, only 10 percent of disabilities that cause missed work are due to accidents; the remaining 90 percent are due to illnesses like heart disease, cancer, or as of late, COVID-19.
Some people neglect the need for disability insurance because they have a spouse with a successful career who they believe can live comfortably on their own.
But even if this is true, chances are your combined lifestyle is based on both of your incomes. If your’s is lost to disability, what will happen to your significant other? Can he or she afford the mortgage on your house on one income? If you are disabled, can your spouse continue paying your student loan debts that will still be owed?
You can minimize the negative financial impact of disability by investing in an individual disability insurance policy.
Disability insurance can be expensive
In general, people spend between 1 percent and 4 percent of their income on a disability insurance policy. Another general rule of thumb is that you will typically pay between 2 percent and 6 percent of your policy’s monthly benefit amount.
It’s possible you may pay more or less than those ranges, especially if you are older, have chronic health conditions, or have a job that makes you more susceptible to a potential disability.
Disability insurance may require a medical exam
Most individual disability insurance policies require the applicant to undergo a paramedical exam once the application is submitted. This is an important part of the underwriting process, as it provides the insurer an assessment of your health and therefore your potential of filing a claim. This could take several days or more, depending on your availability and when a technician is available.
This exam for disability insurance is much like a physical checkup. It should take about 30 minutes. It will consist of an interview to gather a medical history, as well as the collection of blood and urine and recording of height, weight, blood pressure, and pulse.
Disability insurance makes you wait for benefits to kick in
Disability insurance policies come with an elimination period. This is the period of time between when the disability occurs and when benefits are paid. For example, a policy with a 60-day waiting period would not pay benefits for the first 60 days after the insured becomes disabled.
A disability insurance elimination period is a similar concept to the deductible on other types of insurance. It’s designed so that the insurance company does not have to pay 100 percent on a claim; the insured has to pay some of the cost out-of-pocket before benefits kick in.
For short-term disability insurance, in which the maximum time you can receive benefits is one year, the elimination period is typically 14 days.
Long-term disability policies have longer elimination periods, as benefits may last several years. Common options include 30, 60, 90, 180, and 365 days.
Disability insurance often involves a slow, confusing process
Many disability insurance carriers require you to work with an agent to get coverage. Plus, most still use lengthy, cumbersome paper applications.
From the time you submit an application for a disability insurance policy, it may take four to six weeks before your policy is issued. in some cases, it could take longer.
It can also take a considerable amount of time to research carriers and evaluate all of the moving parts involved with disability insurance.
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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