No one wants to think about getting sick or injured. But if you're financially unprepared for a loss of income, disability can lead you to deplete your wealth in other areas. Life insurance — specifically disability insurance — can help you prepare for the worst without sacrificing your savings and investments.
To determine if a disability insurance policy makes sense for you, understand what your risk is, and then compare the cost of assuming that risk yourself to the cost of purchasing insurance.
What's the Chance I'll Suffer a Disability and Need Insurance?
One in four American workers will become disabled at some point in their careers , according to the Council for Disability Awareness, although women are more likely to become disabled than men. And the duration of a potential disability tends to increase as you age, according to "The Physician's Guide to Avoiding Financial Blunders" by Kenneth Rudzinski.
"Lifestyle can also affect your risk," says Karrol Kitt, Ph.D., associate professor of family economics at the University of Texas at Austin. Activities such as skiing, playing contact sports, or riding a motorcycle carry a higher risk of injury. Being overweight or smoking raises your risk, too.
Finally, consider that certain professions correlate with poorer overall health, such as ones that involve exposure to disease and infection, and ones that involve spending a prolonged time sitting.
Can I Assume the Risk of Covering My Own Disability Income?
If you decide to assume the risk yourself instead of purchasing a disability policy, it's important to calculate how much that choice might cost you. "Many people are prepared for one emergency, but few consider what would happen if they had several at once," Kitt says.
First, find out whether your employer offers disability benefits as part of its employee benefits program, when you would qualify for these benefits, and the amount of money you would receive if you are eligible for these benefits.
Then, factor this into your determination of whether you have enough money in reserve to cover your mortgage and bills for three months, six months, a year, or more. Then factor in your health insurance deductible and any other insurance deductibles, such as your auto insurance or homeowners insurance.
Think about whether you're able to keep that much liquid capital on hand — and if doing so will keep you in good financial health. If the answer is no, disability insurance might be a good choice for you.
How Do I Choose the Right Disability Insurance Policy?
If you've made the decision to buy disability insurance, review any group policies offered by your employer first. Group policies are generally less expensive, and the premiums can usually be conveniently deducted from your paycheck. If your employer doesn't offer a plan, you're self-employed, or your income is based on commission or production, you may need a private policy to get adequate coverage.
Some elements to consider when selecting a disability insurance policy:
- Elimination period: The waiting period before you receive benefits.
- Benefit period: The period during which benefits will be paid. It can be defined in various ways: for a certain number of years, up to a certain age, for your lifetime, or through some other definition.
- Benefit amount: The larger your payout, the more expensive the policy usually is.
- Own occupation versus any occupation: Some policies will continue to pay benefits if you're unable to return to your present occupation. Others stop paying if you're able to return to a job that matches your education and experience.
- Guaranteed renewable and non-cancelable: If you can afford it and it's available, look for a policy that you can carry with you as you age without risk of cancellation or premium increase by the insurance company.
If buying disability insurance makes sense for your situation, it can be a good financial protection tool. Learn more about how disability insurance and other types of life insurance can protect your income.
