Should You Have Disability Insurance?

If you get sick, hopefully you have health insurance to pay your medical bills. But if you can’t work, what’s going to replace your income?

Imagine something happened to you today that prevented you from working for the next two years. Maybe you discover you’ve got a disease, such as cancer, or maybe you slip on your front steps and break your back.

If you have health insurance (I hope you do), your doctor and hospital bills could be covered. That’s a relief, but if you’re unable to work, what will you do for income? The answer for many is disability insurance.

Here’s a question I recently received:

I am 64 years old and still working. Is it to my advantage to get long-term disability insurance? — Ted

Well, since it’s time for a year-end financial review, let’s explore this topic, answer Ted’s question, and maybe some you might have.

Who needs disability insurance?

The answer to this question is simple: You want disability insurance if the loss of your income would be catastrophic for you or your family. Unfortunately, however, like most forms of insurance, while it’s nice to have, it may not be so appealing when you see how much it costs.

Here’s how to approach it.

See what you’re eligible for now

While most people think of Social Security as a retirement plan, it’s also a disability plan. If you’ve worked and paid into the Social Security system for at least five of the last 10 years, you’re eligible.

Unfortunately, getting disability benefits from Social Security isn’t a walk in the park. You have to be unable to work in any capacity for at least a year, or be terminal. About 60 percent of applicants are denied, and the average payout is just 40 percent of pre-disability income. You can read more about the qualification process at this page of the Social Security website.

You should also check with your employer. Some automatically provide disability coverage at no cost. Others will pay part of the premium or might allow you to buy it through them at group (discounted) rates.

Either way, you’ll need to understand what those policies do.

Understanding disability coverage

Disability insurance comes in two types — short term and long term.

  • Short term. If you’re unable to work for a relatively short time, typically six months or less, these policies will replace a percentage of your income, up to 100 percent, after all your sick leave is gone.
  • Long term. If you’re out of work longer than six months, you’ll receive 50 percent to 70 percent of your salary. You can buy coverage for a certain period, say 10 years, or until you reach retirement age. Obviously, the length of time, as well as the amount of income replaced, will affect the price. These policies will also require applying for Social Security disability, and payments will be reduced by amounts received from that.

Many employers offer disability insurance for their employees. But plans vary greatly, and some may not offer what you’d consider adequate coverage. In addition, disability payouts from an employer’s policy are subject to taxes, while payouts from individual policies are not.

Nevertheless, you should always review anything available through your employer before considering individual coverage. Individual disability coverage is generally much more expensive and typically requires a physical. And you’ll likely find exclusions for any pre-existing conditions, as well as disability due to injuries suffered during activities considered to be dangerous, such as skydiving. 

How to shop for disability insurance

It’s normally better to shop insurance through a broker representing more than one company, rather than approaching individual companies. But before you begin shopping, learn some terms and think about what you need. Then price it.

Things to look for:

  • “Own occupation.” There are two kinds of disability — the kind where you can’t work at all, and the kind where you can’t do your specific job. For instance, if I lost my voice, I could work, but probably not in television news. Obviously, “own occupation” is more expensive. And be aware, some policies might start as “own occupation,” then switch to “any occupation” a couple of years later.
  • Length of coverage. As I mentioned above, the best, and most expensive, policy is one that takes you all the way to retirement.
  • When it starts. The longer you’re able to wait before the payments kick in, the lower the cost. A policy that doesn’t take effect until one year after a disability will be a lot cheaper than one that kicks in in three months. (This is why having an emergency fund is essential.)
  • The amount of the benefit. This should go without saying, but I’ll say it anyway: The more income the policy is replacing, the more it will cost. Keep in mind that if you’re paying for the policy, the benefits will be nontaxable. So, depending on your tax bracket, a policy that replaces 70 percent of your income could come close to matching your existing take-home pay.
  • Guaranteed renewable. This means you’re guaranteed to be able to keep your coverage as long as you pay the premiums. For example, you buy a policy and are then diagnosed with high blood pressure. Your disability company can’t kick you off the policy because you may now be more likely to become disabled.

Now, back to Ted’s question: “I am 64 years old and still working. Is it to my advantage to get long-term disability insurance?” The answer, Ted, is that if the loss of your income would imperil your family, disability insurance might come in handy. But because you’re so close to Social Security age, you’ll probably be hard-pressed to find a policy. Especially an affordable one.

Got a money-related question you’d like answered?

You can ask a question simply by hitting “reply” to our email newsletter. If you’re not subscribed, fix that right now by clicking here. The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer. Got any words of wisdom you can offer for this week’s question? Share your knowledge and experiences on our Facebook page.

About me

I founded Money Talks News in 1991. I’ve earned a CPA (now inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.

Stacy Johnson

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  • Kolleen Dohermann

    This is a great write up! I was getting ready for laser eye surgery and the thought occurred, “what if I go blind or can’t see well enough to work afterward?”. I started researching disability insurance and was shocked. I make approx. $100k a year and I can’t think of anything I would easily switch to to make that kind of money. Also I found out my work only provides 40% disability insurance so I would only receive $40k in income if I became disabled. Not to shabby but what about retirement which 18% of my salary currently goes too? Most importantly my work policy is “any occupation” so if I were to go blind but could still occupy a $8/hr position guess what? That’s less than $40k a year. The possibility was frightening so I bought a policy. One last thing, you are far more likely to become disabled prior to 65 than dying. So if you are worried about protecting your family and NOT being a burden it may be time to re-prioritize and seriously look into disability insurance.

    • Joanne Ferrato


    • speaksthetruth

      If I may ask: How much was your policy?

  • Sharon Gray Harrill

    We reviewed the costs and relative benefits, turns out if you have a personal policy and then apply for your State disability, you cannot get both…………so the monies spent on a personal policy would be a waste.

    • BJ

      Long-term disability insurance pays FAR more than Social Security Disability You can make $100,000 a year and get less than $30,000 in SSD benefits. Add in all your medical bills, and it doesn’t leave you with much.

      • Sharon Gray Harrill

        I am sorry I should have explained further…..I was referring to short term disability and the disability you can get from the State (i.e. we live in NJ). I was not referring to long term Social Security Disability, AND you can actually pay for a policy and get state disability…..but the short term policy will only pay you the difference between what the State pays and what the policy pays. In my friends case it came out to be $1.00 payment from the policy she purchased (the State disability pay out for her income was one dollar less then the pay out she got from the policy she paid for and got through work). At my job I brought disability insurance up with our insurance broker and he explained the same thing for short term disability (these policies are set to protect you in the short term-less than a year).

      • Lorilu

        Persons on SS Disability are automatically enrolled in Medicare after two years.

        • BJ

          True, but you still pay a lot for Medicare, a Medicare gap policy, and then for deductibles, copays and very large prescription costs. Very, very expensive.

          • Lorilu

            That’s true, but Medicare is still a valuable component of SS disability, and people should know that it’s available.

  • Clay

    Be forewarned: when the insurance company that received your payroll-deducted LTD insurance premiums refuses to pay, only rare attorneys with ERISA specialty can file suit. After a couple of years of stalling, the insurance company offers a lump sum pittance, and only if you sign a nondisclosure statement. Attny gets a third, tells you that’s how every claim with that company (maybe all ins companies?) works. This is one of the largest employers and insurance companies in the country, who for many years took LTD premiums for both the standard LTD 40% income protection and supplemental 20%, so all along you thought you’d be protected from the unexpected with 60% of your income. BTW, this is a case so clear-cut that SocSecDisab approved immediately from med records they requested (no lawyer, no appeal, no medical exam). And ERISA attny says you have to get another attny to sue your employer for the STD part, because STD is company paid thus not ERISA. I held out extra month because initial LTD offer also included release for employer. So disgusted with it all, I haven’t sued employer yet: STD is relatively little, and attny will get a cut of that.

  • Joanne Ferrato

    Good answers.

  • BJ

    The dirty secret about disability insurance is that it rarely covers disabling mental illness. And what 20- or 30-something healthy and happy employee checks to see if mental illness is covered under their employer’s disability policy? No one expects to become disabled by severe, treatment resistant depression. But it happened to me, taking me completely by surprise. I was shocked that the policy provided only two years of benefits for mental illness and full overage for anything else. I would have been better off injured in a bar fight or driving drunk. That would be covered. I bought the best policy the company offered to make sure I would have an income if I was not able to work. I had invested so much in years of education and hard work. I was devastated, emotionally and financially. Most people can be successfully treated for major depression. But employees who do not recover lose not only their life as they knew it — but also their financial stability. It is time that the parity finally won for mental health treatment in health insurance be extended to disability insurance.

  • BJ

    People with a lot of assets need long-term care insurance. However, if you have become disabled and have no assets, it doesn’t help you. And it’s very expensive. But it’s a must for those who have assets and can afford the policy.

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