This is the fourth article in my recent series on insurance. The previous articles can be read herehere and here. In this post I talk about what is disability insurance and why you need it.

When you’re working and bringing income into your family, your financial affairs can run smoothly. But when an illness or injury occurs that impacts your ability to earn money, disability insurance can cover the income gap for you.

What is Disability Insurance and Why You Need it

Disability insurance is one of several ways you can financially protect yourself and those who depend on your income from financial hardship. It’s important to make sure you have enough disability income to cover your needs. Although, if you can’t afford an insurance policy that covers all of your financial needs, some income will certainly be better than none.

Let me explain what is disability insurance and why you need it. And most importantly, how disability insurance works and the benefits you can get from it.

How does disability insurance work?

Disability insurance provides monthly benefit payments in the event you become disabled and are no longer able to work. Depending on the terms and conditions of your policy, your benefits can last anywhere from 12 months to 5 years to age 65 to your death. Make sure you understand your policy so you know what to expect.

The regular monthly income stream replaces employment or self-employment income. You choose how to use your benefit payments. Typically, they are used to cover household expenses and gaps in your health insurance coverage. The goal of disability insurance is to enable you to recover without the financial hardship of income loss and without immediate pressure to find other work.

That’s how it worked for my client Riki (not her real name) who had a thriving business as an interior designer. A car accident that was not her fault, left Riki with physical injuries and concentration problems. Disability insurance provided necessary income, enabling her to heal, recover and get her strength and confidence back.

Disability insurance has key features that you should keep in mind

The monthly benefit payments can be taxable or non-taxable, depending on how your policy is written. Many people prefer non-taxable benefit payments because they know their exact income, making it easier to plan monthly expenses. If your employer pays the disability insurance premiums on your behalf, it’s likely that your payments will be taxable.

You can typically add your disability insurance payments to your Social Security disability benefits (if you qualify) or to any another government-sponsored program that covers your condition.

There are two kinds of disability insurance: short-term and long-term. Short-term disability payments begin soon after a claim is made, but end within two years. Long-term disability payments take longer to get going (usually 1 to 2 months), but can last until age 65 (when your retirement benefits kick in) or your death. Long-term disability coverage can get very expensive.

Disability income policies will have a waiting period between when you’re injured or diagnosed with an illness and when the monthly payments start. This can be between 30 and 90 days depending on your policy.

With disability insurance, you need to prove that you are incapable of working. This can take a lot of time and effort and involve significantly more paperwork than critical illness insurance.

What is Disability Insurance and Why You Need it?

Who Needs Disability Insurance?

If covering your expenses without income for a period of time – and in particular an extended period of time – would be financially devastating to you and your family, then you should consider disability insurance. Here are some factors that you need to consider as you make your decision to choose a disability insurance policy:

Your age

While older people file more disability insurance claims than younger people, your insurance premiums will be lower the younger you are when you start. In addition, younger people often have a greater need for disability insurance than older people who’ve amassed wealth during their lifetime that they can use to cover expenses in the event of illness or injury.

The number of your dependents

If many people in your family need your income support to survive, then disability insurance may be right for you.

Your fixed monthly expenses

If your fixed expenses are high and inflexible, disability coverage would be helpful. If your fixed expenses are low and you can easily reduce your discretionary spending, you might not need disability insurance.

Your overall health and the health of your family

Most long-term disability insurance claims are for illness not for injury. If your health is weak or if your family suffers from certain medical issues, disability insurance would be beneficial for your family.

The amount of money you have set aside to cover a financial emergency

If your emergency account is well-funded and you can cover at least six months of household expenses, then short-term disability insurance can be a waste of money. A better alternative is to ditch the insurance and save the money you would otherwise spend on insurance premiums. Pad your own pockets rather than those of an insurance company.

Your wealth and income from sources other than employment

If you have sufficient wealth from savings and investments and/or income from sources other than employment that can cover your expenses, including medical expenses, consider canceling your disability insurance.

How dangerous is your job?

If your job is dangerous and the likelihood of injury is high, disability insurance is a worthwhile investment in financial protection and your financial peace of mind.

Do you get disability coverage from your employer?

If disability insurance is not part of your benefit package, considering buying a private policy.

Are you self-employed?

If you and your family are dependent on your income and your disability would cause financial hardship, disability coverage may be critical for the financial maintenance of yourself and your loved ones.

Related articles on insurance:

 

Disability Insurance vs Critical Illness Insurance: Which One Should You Choose?

What is disability insurance

 

People often confuse disability insurance with critical illness insurance, assuming that if they have one, they don’t need the other. But that is a misconception. These two types of insurance provide different benefits. Critical illness insurance is claimed and paid out immediately if you are diagnosed with a severe, often life changing illness. Even if you recover completely from your illness, you still get the money to cover your expenses. And if you are physically capable of working after your diagnosis, you can still receive your full benefit payout.

With disability insurance on the other hand, there is usually a waiting period of between 30 and 90 days before you can start receiving benefits. You will need to prove that you are unable to work. If your physical situation changes and you recover from your illness, even partially, you may cease receiving benefit payments or they may be reduced.

Conclusion

In conclusion, disability insurance is an excellent source of financial protection for you and your loved ones. It’s a good idea to spend some time figuring out whether you have enough disability coverage to manage your financial needs in the event of an illness or injury. Critical illness insurance is an additional way of providing financial protection.

I hope you now have  greater clarity on what is disability insurance and why you need it. Make sure to re-examine your financial needs every few years – especially as your income, expenses and net worth changes. It would be a shame to pay for insurance unnecessarily because you forgot to review your personal situation. Similarly, you don’t want to suffer from insufficient insurance coverage.

The bottom line: Stay connected with your finances. Because nobody cares more about your money than you do!

Want to turn your financial dreams into a reality? Reach out for a free Get Acquainted Call. I would love to see how I can support you.

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