Disability insurance is one of the most overlooked yet crucial types of insurance coverage. While most people understand the need for life insurance, many fail to consider what would happen if they became unable to work due to illness or injury but were still alive and had ongoing expenses.
The statistics around disability are sobering. According to the Social Security Administration, more than 25% of 20-year-olds will become disabled for at least one year before reaching retirement age. Despite these odds, only about 5% of workers have long-term disability insurance through their employer, and even fewer have individual coverage.
Your ability to earn income is likely your most valuable asset. If you're 35 years old and earn $50,000 annually, your future earning potential over your working lifetime is approximately $1.5 million. Protecting this income stream is just as important as insuring your home or car.
There are two main types of disability insurance: short-term and long-term. Short-term disability typically covers 3-12 months of income replacement and may be available through your employer. Long-term disability can provide benefits for several years or until retirement age, depending on your policy.
When evaluating disability insurance, pay close attention to the definition of disability. Some policies only pay benefits if you can't perform any job (any occupation coverage), while others only pay if you can't work in your specific profession (own occupation coverage). Own occupation coverage is generally preferable but more expensive.
The benefit period is another crucial factor. Some policies provide benefits for only a few years, while others continue until age 65 or 67. Longer benefit periods provide better protection but come with higher premiums.
Most disability insurance policies have an elimination period, which is like a deductible but measured in time rather than money. Common elimination periods range from 30 days to one year. Longer elimination periods result in lower premiums but mean you'll need to support yourself longer without benefits.
Social Security Disability Insurance (SSDI) provides some disability benefits, but the qualification requirements are very strict, and the benefits are often insufficient to maintain your standard of living. Private disability insurance can supplement SSDI or provide coverage when SSDI doesn't apply.
Don't wait until it's too late to consider disability insurance. Like all insurance, you need to purchase it while you're healthy and able to qualify for coverage.