Should You Have Disability Insurance?

Photo (cc) by GYLo

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.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
16 Products That Solve Everyday Annoyances
16 Products That Solve Everyday Annoyances

These items put an end to the daily irritations that bug you the most.

3 Reasons You Can’t Rely on Medicare Alone
3 Reasons You Can’t Rely on Medicare Alone

Counting on Medicare to cover health care costs can jeopardize your retirement plans.

5 States Where Drivers Pay the Most for Car Insurance
5 States Where Drivers Pay the Most for Car Insurance

Auto insurance will cost you more than three times as much in one state compared with another. Here’s how to lower your rates no matter where you live.

7 Things I Never Buy at Costco
7 Things I Never Buy at Costco

A bulk buy isn’t always the best buy.

13 Streaming TV Services That Cost $20 a Month — or Less
13 Streaming TV Services That Cost $20 a Month — or Less

Before shelling out for more expensive options, check out this diverse list.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

How to Buy Gas At Costco Without a Membership
How to Buy Gas At Costco Without a Membership

The warehouse club often has some of the cheapest gas in town. Here’s how you can get it as a nonmember.

10 Things to Stop Buying If You Want a Clutter-Free Home
10 Things to Stop Buying If You Want a Clutter-Free Home

If you like to keep things simple, avoid these purchases.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Vacuums from this brand can last a half-century, if not longer — and they’re hot on the resale market.

A Simple Way to Silence Robocalls Today
A Simple Way to Silence Robocalls Today

A few steps can keep your phone from ringing when a spammer calls.

This Company Makes the Best Tires in America
This Company Makes the Best Tires in America

Driver satisfaction with tires is at an all-time high, but one brand stands out.

This Health Issue Can Hint at Dementia Years in Advance
This Health Issue Can Hint at Dementia Years in Advance

One type of pain is especially associated with cognitive decline.

Can I Switch to Spousal Social Security Benefits When My Ex Dies?
Can I Switch to Spousal Social Security Benefits When My Ex Dies?

Knowing when to claim can help you maximize benefits.

Medicare Will Not Cover These 6 Medical Costs
Medicare Will Not Cover These 6 Medical Costs

Don’t let these health care expenses catch you off guard in retirement.

8 Things You Should Always Buy on Amazon
8 Things You Should Always Buy on Amazon

The giant retailer shines when it comes to these things, from basics to hard-to-find specialty goods.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

5 Ways to Fill Your Pantry With Free Food
5 Ways to Fill Your Pantry With Free Food

Anyone can take advantage of these resources.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

This iconic dinnerware is prized for everyday use as well as reselling for profit.

Beware This Hidden Ingredient in Rotisserie Chicken
Beware This Hidden Ingredient in Rotisserie Chicken

Something foul may lurk in those delicious, ready-to-eat birds.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

6 Reasons You Should Stop Hiding Cash at Home
6 Reasons You Should Stop Hiding Cash at Home

Stashing money around the house is anything but harmless.

5 States With the Worst Health Care for Retirees
5 States With the Worst Health Care for Retirees

All of these states are located in the same region of the nation.

12 Deep Discounts Available on Amazon This Friday
12 Deep Discounts Available on Amazon This Friday

These items are steeply discounted — but the deals won’t last long.

5 Products You Should Never Buy Generic
5 Products You Should Never Buy Generic

Sometimes the brand-name version is clearly superior.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.