What’s your most important asset? Your home? Your car? Your 401(k) or brokerage account? Actually, your most important asset is your ability to earn an income.
For example, a 22 year old earning $40,000 per year (and never increasing their income) will earn $1.6 million over a 40-year career if they retire at age 62. If a permanently disabling injury or illness strikes this 22-year-old when they’re 32, that $1.6 million in earnings now shrinks to $400,000. They’ll then need to live on a dramatically reduced income from Social Security (the estimated average benefit is $1,277 per month in 2021) and their savings (for as long as that lasts).
There is an alternative: long-term disability insurance. This article will help you determine if getting disability insurance is a wise choice for you or if it’s a waste of your hard-earned money. If it will benefit you, we’ll give you some tips on how to get it.
There is a lot of pressure from family, friends, and life insurance companies to buy life insurance, so you won’t leave your family in financial ruin. And that makes perfect sense.
But, have you considered that more than one in four 20-year-olds will experience a disability lasting 90 days or more before they reach age 67, according to the Social Security Administration? If you compare the disability rate to the mortality rate, it makes a for a pretty compelling argument that you need disability insurance
Here are four questions you can ask yourself to see if getting disability insurance makes sense for you.
1. How much do I rely on my income?
Some people don’t need their paycheck. They work and take the money, but they don’t need the money (they’re the envy of many of us). They may not need their income because of the passive income they have from investments or a business interest. Perhaps their spouse's income is sufficient to pay all of their living expenses, or they were left a large inheritance.
If that doesn’t describe you, don’t worry — you’re not alone. Most people rely on their paycheck to meet their daily and monthly needs. Do you need your income to:
- Make a mortgage or rent payment every month?
- Make a car payment or lease payment monthly?
- Put food on the table every day?
- Pay off a student loan?
- Have fun?
If you said “yes” to any of these questions, you rely on your income. Disability insurance is necessary for you to keep a roof over your head and food on the table if you can’t get up and go to work.
2. Do my loved ones depend on my income?
If you’re married and have children, you know how it feels to have financial obligations every month (even if you and your spouse don’t have children).
Take a look at your monthly budget and ask yourself what it would feel like not to be able to meet your obligations and provide an income for food, shelter, clothing, healthcare, and so much more.
If you do have kids, you know how expensive that can get. Braces, after-school sports, and activities, education, clothing, entertainment, etc. They’re worth every penny, but they cost a lot of pennies.
If you bring home a paycheck that provides for your family, you need disability insurance.
3. How robust is my financial safety net?
Many people have just enough money in their checking account to get by until the next paycheck. Very few people have an adequate emergency fund (six months of income), savings, or investments to meet their financial needs if they couldn’t work.
Getting back to the 22-year-old mentioned earlier, how big of a safety net would they need at that age? How about 32? 42?
Having six months of income in a savings account is recommended by just about every financial planner. It’s great to have if the car needs expensive repairs or the air conditioning system has to be replaced. But, it takes a very large safety net to meet the basic needs of a family for an extended period of time. Disability insurance is that safety net many people need.
[ Related read: How to tell if your financial safety net is big enough ]
4. Can I get disability insurance through my employer?
If one of the employee benefits offered where you work is group disability insurance, you should enroll as soon as possible if the answer to any of the three questions you’ve just asked yourself is of concern to you.
If you can’t get disability insurance through your job (employer doesn’t offer it, you’re self-employed, etc.), you need to get disability insurance on your own as soon as possible.
Not everyone needs disability insurance.
Like those fortunate ones mentioned above, some people have a passive income stream from a business, investments, or other accounts that provide them all the money they need every month.
Others may have already achieved financial freedom. For example, they built a lucrative business and sold it, they were the beneficiaries of a large life insurance policy, or they had a high-paying job for enough years to set themselves up for the rest of their lives.
And, some people don’t work in the traditional sense, like stay-at-home parents (a noble calling). But, they couldn’t get disability insurance if they wanted to because they technically have no income.
There are four ways to get disability insurance. Not all will apply to you.
- Get employer-sponsored group insurance at work. Find out about the coverage (percent of salary replaced, how long you have to be disabled to start getting payments, how long you’ll get those payments) and see if your employer pays some or all of the premium.
- Buy it if it’s offered through the workplace. Some employers don’t offer long-term disability insurance as an employee benefit, but they make it available on an individual basis by giving disability sellers access to their employees.
- Get it through an association you belong to. Some professional associations offer group disability coverage as a member benefit.
- Buy an individual disability insurance plan. You can meet with an insurance agent that sells disability insurance, or you can buy it conveniently online.
If you don’t have disability insurance and you’ve seen how important it is that you and your family have income protection, the best time to get it is now. Get it while you can still qualify health-wise and lock in the rate for your age (the older you are — the more expensive it is). It typically only costs 1-3% of your annual salary. That's a small price to pay for the peace of mind you'll get knowing there'll still be money in your bank account if you aren’t able to work.
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.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.