Eight Reasons to Enroll in Disability Insurance

by Kaitlyn Ranze

Disability as a concept so abstract, we don’t think about it until something happens. Then you realize how important it is to have stability – not just physically, but also to your family financially. di

The reality is, most people are better prepared financially for death than they are disability.

Do you have disability insurance? If not, should you get it? In this article, we’ll tackle what disability insurance covers and how it may be able to help protect against financial distress in case of injury or illness.

What is disability insurance

In order to begin at a logical place, let’s break down what disability insurance actually is. Disability insurance is a form of protection against loss of income in the event that disability strikes. If you can’t work, disability insurance will provide a monthly benefit to help replace your income while you are disabled. 

There are limitations to what disability insurance will cover

But not every case of disability is covered by your insurance. For example, if you have a disability that is caused by an injury sustained while engaging in risky behavior, disability insurance will probably not payout. Only disabilities that result from things like illness or accident are covered under disability insurance. Furthermore, the disability has to be severe enough for it to impact your ability to work.

What does the disability insurance get out of covering you

Disability insurance is more than just a simple check deposited into your account each month. Disability insurance operates more like an investment scheme where the premiums you pay are invested. Those investments are then used to generate returns. These returns are then paid out to policyholders should they become disabled. So disability insurance is actually a form of “living benefit” where disability benefits can be paid to you even after you have stopped paying premiums.

A good insurance policy is priceless because it protects your family from financial catastrophe, and here are the 8 reasons why you need disability insurance.

8 Reasons Why You Need Disability Insurance:

1) Disability occurs more commonly than you would think

One out of every four people will become disabled before reaching retirement age. That’s 25% of the entire U.S. population, with more than 375,000 Americans becoming totally disabled every year.

2) Social Security disability benefits probably won’t be enough

At the beginning of 2019, Social Security paid an average monthly disability benefit of about $1,234. This is barely enough to keep a beneficiary above the 2018 poverty level ($12,140 annually). Meanwhile,  most income earners, regardless of income level, have spending commitments that consume 65-75% of normal cash flow.

(Read more about applying for benefits here.)

3) Disability is unpredictable

You can’t predict disability any more than you can predict death – it could happen to everyone at any time. Unlike other policies such as life or health insurance, disability can affect anyone from teenagers to the elderly.

4) You’ll still have income if you’re unable to work

If you’re disabled and unable to work for a period of one year or longer, most disability insurance plans provide you with roughly 66% of your current gross monthly income on average. That’s two-thirds of your salary that will come in handy to secure your financial position.

5) Disability insurance reduces the likelihood of losing your home

According to Bankrate’s July 2021 Emergency Savings Survey, more than half of Americans (or 51 percent) have less than three months’ worth of expenses covered in an emergency fund. This means that if you become disabled without an emergency fund, your home mortgage could be in jeopardy. After all, as many as 12% of disability recipients end up having their homes foreclosed upon because they were unable to make their mortgage payments. In fact, nearly half (46%) of all foreclosures on conventional mortgages are caused by a disability.

6)Protects Your Savings

Another aspect of disability insurance that is often overlooked is how it protects your savings. If you saved 10% of your income each year, one year of being totally disabled could wipe out 10 years of savings. With disability insurance, you’ll more easily maintain a certain standard of living without draining your savings.

7 )Protects Your Retirement

Whether short-term or life-changing, your disability will have long-term impacts. But that doesn’t mean that it has to impact your financial legacy. After savings is drained, many disabled resort to early withdrawal from retirement. (Though with a qualifying disability, you will not face massive penalties for early withdrawal.)

8)Protects Your Legacy

We touched on this a bit, but ultimately, disability insurance also protects your legacy.  If disability strikes, disability insurance will continue to provide benefits that you can use toward the cost of sending your kids to daycare, school or continuing their education. Your retirement, savings, and assets are all more secure when you continue to have income.

Disability insurance is confusing but worth understanding.

The biggest problem that people encounter with disability insurance is actually figuring out how disability insurance works. Fortunately, disability insurance has gotten much simpler to understand thanks to increasing regulations and greater standardization of policies. 

There are companies that specialize in providing disability insurance. They will walk you through the process of purchasing disability insurance and educating you on disability insurance policies. You could also consider working with an insurance broker.

It’s important to note that disability insurance policies expire after a period if your disability claim is not approved or you fail to submit disability benefits claims as required by your disability insurance policy. 

Short Term versus Long Term Disability

If you’re shopping for policies, it’s important to note the difference between short term versus long term disability. Short term disability is intended to cover you immediately following a serious illness or injury (typically for 60-90 days up to six months). Long term disability insurance, on the other hand, aims to maintain a certain portion of your income if your condition keeps you out of work past the end of your short term disability benefit period, typically 5-10 years. (Be sure to read the policy limitations and restrictions before signing on the dotted line.)

Benefits Paid with Disability Insurance

Many disability policies offer additional features such as accident and critical illness insurances. These types of disability insurance benefits can pay a lump sum benefit if you’re diagnosed with cancer, heart attack, or suffer from a life-threatening illness.

What if the disability is not severe enough for it to have a significant impact on your ability to work, but still impacts your ability to earn some money?  Some disability insurances can provide cash benefits, provided in the form of an annuity.

An annuity is a series of payments made at regular intervals over time. Your disability insurance can provide benefits in the form of an annuity so that income continues to flow to you even if the disability does not have a significant impact on your working life.

Supplemental disability insurance provided by a life insurance policy is not the same as disability insurance

Supplemental disability benefits vary from policy to policy. They can be purchased on a stand-alone basis or as part of a life insurance plan. However, supplemental disability insurance benefits will not pay benefits if the insured person becomes disabled. Instead, they provide a disability benefit only when beneficiaries die or become critically and terminally ill.

Cost of Disability Insurance

Disability insurance can normally be obtained for between $10 and $20 per month depending on your age, gender, and overall health. The older you are and the less healthy you are, the more expensive disability insurance will be. The younger and healthier you are, the cheaper disability insurance will likely be. However, your company may offer disability insurance at a set rate during open enrollment.

How much disability insurance should you have?

That depends. Take a look at how much of your income is committed to a set expense. Because most people, regardless of income have 65-75% of their total income allocated to spending, it’s wise to have at least that much in coverage.

 So, if you are currently without disability insurance, there has never been a better time to consider purchasing disability insurance. Weighing the pros and cons of disability insurance is crucial before making a decision about enrollment. 

As with any type of policy, know what your needs are first so that you can find one which will suit them best, then weigh the costs against how much protection they provide to determine just how necessary they really are.

Given that many Americans are living longer, there’s no better time than now to consider if this coverage could be right for you.   Not only does disability insurance protect your savings, but it also protects the things that matter most in life.

Related Reads:

Don’t let Disability Financially Disrupt Your Life

Do You Really Need Life Insurance?

Health Insurance: The Good, the Bad, and the Sick

What is Generational Wealth?

Planning Ahead From Finances to Feelings, How Estate Planning Can Help


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