Why Life Insurance is No Substitute for Disability Insurance

Americans are more likely to have life insurance than disability coverage, but likely need disability insurance more.
Alice Holbrook
By Alice Holbrook 

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Life insurance and disability insurance are both important for working families. But when you don’t have much money to spare, paying for policies like these can seem like a luxury. According to LIMRA, a marketing research organization, 70% of consumers say essential living expenses are keeping them from either buying life insurance or increasing the coverage they have.

And buying both life insurance and disability insurance? That might seem financially impossible.

But insurance is about protecting finances from disaster. Americans are more likely to have life insurance than disability coverage, yet the chances of needing disability insurance are higher. LIMRA says 44% of people have individual life insurance policies, compared with 29% who have disability coverage.

If you’re in your 20s, you have more than a 1-in-4 chance of becoming disabled before you retire, according to the Social Security Administration. By contrast, for a 25-year-old male, the probability of dying before age 65 is 1 in 6, according to Life Happens, a consumer education organization. For a 25-year-old woman, the chances of dying before 65 are 1 in 9.

Many people think disabilities are caused primarily by serious accidents, but that’s one of the biggest myths about disabilities, according to LIMRA. The top causes of disability are actually chronic conditions such as back problems and muscle pain.

And life insurance won’t pay for any disability costs. To protect your income, consider having disability insurance in addition to life insurance.

Life insurance vs. disability insurance benefits

Life insurance and disability insurance cover very different things. Life insurance won’t pay out for disability, and vice versa.

Life insurance pays your beneficiaries if you die. In some cases, policyholders can access life insurance benefits early, known as “living benefits.” However, eligibility for living benefits (previously known as “accelerated death benefits”) is generally restricted to those with a terminal illness.

Policyholders with permanent life insurance can take loans from their policy’s cash value to pay for expenses. But this isn’t necessarily something to rely on. It can take many years for a policy to build up enough cash value to be useful. And if the underlying investments in your policy don’t perform well, you may not have much to borrow. Finally, if a loan isn’t repaid, the benefits paid to your family after you die would be reduced.

Disability insurance pays part of your salary (often 60%) during periods in which you’re too sick or injured to work. Most policies require a certain time period of disability before they kick in, and cover a specific benefit period. There are both short-term (whose benefits generally expire after two years or less) and long-term disability policies.

There are potentially other payments related to disability, but you shouldn’t count on them. Workers’ compensation, for example, applies only if you’re injured at work, and Social Security disability benefits have strict eligibility requirements and average only $1,165 a month.

Reducing costs for both types of coverage

A term life insurance quote for a 20-year, $500,000 policy for a healthy 35-year-old woman could be around $20 a month, according to Trusted Choice, an organization that represents independent agents.

If you’re shopping for life insurance and looking to reduce costs, you can reduce your term life coverage amount and/or term length. Shopping around also pays off, as prices from different life insurance companies can vary by hundreds and even thousands of dollars for the same coverage.

Maxing out any group life insurance available through work is also generally a cost-effective way to buy life insurance.

While disability insurance through work is often free to employees, an individual long-term disability policy will cost about 1.5% to 3% of your gross income, according to the National Association of Health Underwriters.

There are also ways to reduce disability premiums. Opting for a longer period before benefits kick in, or a shorter benefit period, will lower premiums.

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