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Do You Need Disability Insurance?

April 15, 2014
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By Brian Frederick

Learn more about Brian on NerdWallet’s Ask an Advisor

The short answer is “yes.” If your family relies on your income, you need disability insurance. According to the Affordable Insurance Protection website, over the course of your career, you are three and a half times more likely to be injured and need disability coverage than you are to die during your working days and need life insurance.

You never know when you might suffer a temporary or permanent disability. A friend of mine tweaked his back lifting his daughter out of the bathtub, and that rendered him unable to work for a month. I’ve noticed that I’ve tweaked my back when getting my sons in and out of the car in tight parking spaces as well.

False beliefs about disability insurance

  • “Social Security handles this.” Many people assume the Social Security system will take care of them should they become disabled. Don’t be one of them. Qualifying for Social Security benefits is not only difficult, the process takes a long time and payments don’t begin until the process is over. To qualify, you have to prove you can’t do any job, not just the one you currently have. So if you’re a brain surgeon and you become injured and can no longer do your job, but you can bus tables, Social Security disability payments will be out of your reach. Even if you qualify for Social Security disability benefits, the average payout is only 40% of a person’s income.
  • “Worker’s compensation has me covered.” Worker’s comp replaces lost income only if an injury or illness occurs while on the job. Fewer than 5% of disabling accidents or illnesses are work-related.
  • “Only older people need disability insurance.” According to the Social Security Administration, one in four 20-year-olds will become disabled and unable to work before they reach the age of 67. Apply while you’re young and healthy because many policies require medical underwriting, which may include reviewing your medical records, taking blood tests and having a physical.

For these reasons and more, you need to have disability insurance. The good news is that if you buy your own insurance and need to collect on it, payouts will be tax-free. If you opt for disability coverage that’s wholly paid for by your employer, you do have to pay taxes on those payouts.

When shopping for disability insurance, be sure to find out about the elimination period. That’s the span of time it takes to get your benefits after you apply. However, the shorter the time period, the more expensive the premiums. By lengthening the elimination period, you can lower your premiums.

The difference between short- and long-term disability

Short-term insurance usually covers a portion of your lost salary should an injury or illness keep you from working for more than a few days. This insurance usually doesn’t kick in until you’ve used up your sick leave. The duration of this type of policy varies, but six months is the average.

Long-term disability insurance takes up where short-term left off. This may cover you for five to ten years, but you want one that covers you until age 65.

Where to buy disability insurance

The best place to get this type of insurance is from your employer, if it’s available. An employer often will offer employees short-term disability insurance as an elective benefit and throw in long-term disability at no extra cost. Some employers pay 100% of the premiums, some share the cost with their employees and the rest offer it as a voluntary benefit (meaning the employee pays the entire premium). But, according to the Bureau of Labor Statistics, only about one-third of private-industry workers have access to employer-sponsored coverage.

When you can’t get disability insurance from your employer, try your professional association. They usually offer a group policy tailored specifically to your profession, whether you’re a lawyer, doctor, dentist, financial advisor, etc.

If neither of the above sources have what you’re looking for, you’ll need to go to the private marketplace, where disability insurance can be expensive. Still, you need to have it. Ask a financial advisor for advice on where to get the best policy for you.

A helpful hint: Drop your policy when you reach 65. Even if you’re disabled at 65, you’re considered retired and the insurance won’t pay. It doesn’t matter if you’re still working.

Does your employer offer short- and long-term disability? Did you think you didn’t need it?