Disability insurance is, perhaps, the most important and least understood of all insurance policies. It may also be the least likely to be purchased of any of the main types of insurance.
You may wonder why it is important to buy disability insurance. And, even if you do start the process of researching disability insurance options, upon receiving a price quote you may think it costs too much, it isn’t worth it, and that you will never need it.
However, this line of thinking, based solely on a price quote, could lead to disastrous results for yourself and your loved ones.
The cost of disability insurance
As a quick rule of thumb, a good disability insurance plan will likely cost you 1-3% of your annual income. This means that if you are earning $200,000 a year, you can expect to pay anywhere from $2,000 to $6,000 for a disability insurance policy with a maximum monthly benefit. A maximum monthly benefit will generally pay out 50% – 70% of your gross annual income as tax-free income.
In other words, you pay 1 to 3 cents on every dollar you earn to insure 50 to 70 cents of every dollar of your gross income. Compare that to what the government charges you in taxes for the benefits offered to you in return.
Disability insurance is a discounted emergency savings plan
It is common for financial experts to recommend that people build 3-6 months of emergency savings in case of unforeseen problems, circumstances, and expenses in life. However, what if an emergency requires an income beyond that period of time? When a disability occurs it can easily require an ongoing income for years. Instead of trying to build that large of a savings account (which would be impractical for most people), being required to dip into future retirement savings, or seeking outside help from family, GoFundMe, or the government, you can pay a penny or two out of each dollar you earn to guarantee a long-term emergency savings account.
The likelihood of becoming disabled
According to the Social Security Administration, “For an insured worker who attains age 20 in 2022, the probability of becoming disabled between age 20 and normal retirement age is 25 percent, and the probability of dying between age 20 and normal retirement age is 13 percent.” In other words, according to the best data available (and actuarial science), you are much more likely to need disability insurance than a term life insurance policy that ends prior to or at retirement. Of course, this is certainly not a reason to skip purchasing life insurance before retirement and is also a reminder of the importance of owning life insurance after retirement.
Additionally, when many people think of a disability they think of something that happens as a result of some type of freak accident (car, bike, or sports accident). In reality, illnesses are much more likely to cause a long-term disability than an accident, and illnesses may be even more debilitating, difficult to predict, and to guard against.
Social Security Disability Insurance (SSDI)
If Social Security Disability Insurance (SSDI) is your plan for disability insurance, you need to realize that you will have to wait at least a year for those benefits to pay out. Additionally, there are much stricter qualifications to receive Social Security Disability Insurance benefits than to receive disability insurance benefits from a private disability insurance policy. As one example, if you are judged to be able to do work in any substantial gainful activity you will not qualify for Social Security Disability Insurance.
Don’t wait too long to purchase disability insurance
If you wait too long to purchase a disability insurance policy you may, as a result, lose the opportunity to acquire comprehensive coverage. In other words, if you wait until after a back injury, a problem with your vision, or a diagnosed or chronic illness of some kind, the insurance company will still allow you to purchase a disability insurance policy but they will put an exclusion in your policy, which will prevent benefits from paying out in the event the disability is related to that pre-existing condition. In other words, the very disability most likely to prevent you from being able to work is the one that the company will not insure if it is a pre-existing condition.
But what if I still don’t feel comfortable paying that much for disability insurance?
If, after reading this, you are still concerned about the cost of disability insurance, and spending money on a product you believe you will never use (and hopefully won’t!), there are a few different options you can consider to lower your cost and not lose your money:
- Return of Premium (ROP) Benefit: While this will increase your premium, you will get a refund of all premiums paid into your policy at age 65. In other words, if you don’t use your policy you will get all your money back.
- Social Insurance Substitute (SIS) benefit: This will allow you to keep the same monthly benefit amount but lower your cost since your monthly benefit from the disability insurance policy will be decreased by any benefits provided by Social Security Disability Insurance. In other words, you will ultimately still get the same monthly benefit amount you apply for, but it will be at a lower price and could be split between the insurance company and the government.
- Any Policy is Better than None: If you can’t afford the quoted premium for, or choose not to get a policy with, a maximum monthly benefit, it is still better to get any benefit amount instead of foregoing disability insurance altogether. Like with an emergency savings account and life insurance, if something happens to you, you and your loved ones will be very glad to have at least some money set aside to help during such circumstances.
Protect your income with disability insurance
With this information, we hope you now have a better understanding of the value of disability insurance and recognize how it is worth much more than what you will pay for it. Contact us today to learn about the best disability insurance options available to you. We will provide you with price quotes, company information, and an online application process to help you get disability insurance and greater financial security for you and your family for life!