If someone asked you to name your most valuable asset (other than time and family, of course), what would you say? Your house? 401(k)? Maybe your vehicle? The truth is that for most people, their most valuable asset is the ability to earn an income.
If you’re 30 years old, you probably have another 35 years of work ahead of you (fingers crossed). You’re still in the early stages of your career, so we’ll use an annual income of $42,000, which is about 25% less than the 2020 median of $56,310. Even if your salary stays exactly the same between now and age 65, with no raises or promotions, your remaining career earnings would total $1,470,000.
Canceling your homeowners insurance is unthinkable to most people. Even going without collision insurance on a $20,000 car would be a non-starter for the average person. But for some reason, relatively few seek out disability income insurance to help protect against losing their paychecks to illness or injury, even though that income is potentially worth far more.
What about Social Security and workers’ compensation?
Workers’ compensation and Social Security Disability Insurance both provide much needed coverage for those who qualify, but if you’re tempted to rely on them alone for disability coverage if you get sick or injured and can’t work, you may want to reconsider.
Workers’ compensation
Workers’ compensation is especially important for those who work in dangerous or physically demanding occupations, but it only covers conditions that are directly work-related. According to the Council for Disability Awareness, of the 5.6% of working Americans who experience a short-term disability every year, almost all are non-occupational in origin. The most common causes of short term disability claims are actually pregnancy, musculoskeletal disorders, and digestive disorders.
Social Security Disability Insurance
Unlike workers’ compensation, Social Security Disability Insurance (SSDI) actually will cover disabilities caused by illnesses and injuries that aren’t work-related, but that doesn’t mean it’s easy to qualify. (The sheer number of attorneys who specialize in SSDI claims can testify to that fact.)
To qualify for Social Security Disability benefits, you’ll need to have a disability that’s expected to last for at least one year or result in death. The disability must prevent you from doing the work you’ve done previously, or any other occupation. You’ll also need to have worked long enough, and recently enough, to have the necessary Social Security work credits. Among those who do qualify, the average monthly SSDI benefit was $1,280 as of April 2021.
That said, Social Security can be a viable long term disability insurance option for those who are eligible. But SSDI requires a five-month waiting period, so the soonest you’d receive benefits is at the start of the sixth month in most cases. If you don’t have the resources to weather several months without an income, you might still want a short term disability insurance policy as a supplement to help fill the gap before SSDI benefits kick in.
Who needs disability insurance?
Deciding if disability income insurance is worth the cost depends largely on your situation. Like we mentioned, while just about everyone who relies on a paycheck to cover their expenses could benefit from coverage, there are some cases that make disability insurance especially important. Those include…
If you’re the sole breadwinner
Being the only person in your household who earns a paycheck makes protecting that income a necessity. That’s especially true for single parents, since a partner going back to work isn’t an option. If you were to come down with a critical illness or experience a debilitating injury, you want to ensure you and your family are covered by your individual disability insurance. If your loved ones rely on you as the sole means of support, you might want to move disability insurance near the top of your financial planning to-do list.
If you own a home
Purchasing a new home often leads people to seek out life insurance, since the loss of your income could make covering the mortgage difficult or impossible for the surviving partner. That’s a great idea, but you may want to consider adding disability insurance as well.
You’re much more likely to become disabled than to die before reaching retirement age. And while getting sick or injured is obviously preferable to dying, the effects on your family’s finances can be equally painful. Your income is gone, but your cost of living continues, along with medical bills and prescription medicines in all likelihood. In fact, medical issues have historically accounted for about half of mortgage foreclosures according to at least one study.
Having both a disability income insurance policy and a term life insurance policy can be a good way to ensure you or your partner is able to cover the monthly mortgage payment if you become too sick or injured to work, or even worse – you pass away.
If you don’t have an emergency fund
Don’t have six months’ salary in your savings account? You’re not alone. Almost two-thirds of Americans say they’ve lived paycheck to paycheck since COVID arrived in the states. This article has some great tips to help kickstart your emergency fund, but as 2020 proved, emergencies don’t always wait until you’re ready for them.
But how does disability insurance work? When purchasing a disability insurance policy, you’ll need to choose an elimination period, which determines how quickly you’ll become eligible for benefits if you’re sick or injured and can’t work. With short term disability insurance, the elimination period options typically range from as little as 14 days to as long as 60. With a 14 day elimination period, you’d be eligible to receive benefits after just two weeks of disability.
Choosing a shorter elimination period will increase your monthly premiums a bit, but if your savings are currently running low, choosing a short term disability insurance policy with a short elimination period can help fill the gap.
If you have a physically demanding job
If you have a physically demanding occupation, medical insurance is even more of a necessity than usual. But while health insurance can help cover your medical bills, it won’t give you financial security if your paycheck stops. If your occupation requires standing, lifting, climbing, or some other strenuous activity, you should definitely consider disability insurance. Not just because you’re more likely to be injured on the job (although there’s that too), but because a relatively minor illness or injury can make your daily tasks difficult or impossible.
If that’s the case for you, it might be a good idea to look into individual disability insurance, including short and long term disability coverage.
If you have a lot of debt
Fitting student loan and credit card payments into your budget can be difficult even in the best of times. Losing your income can kick off a downward spiral of increasing debt, late fees, and collections that can take years to recover from. A recent study found that 66.5% of all bankruptcies were related to medical issues, including health care bills and time out of work. If you have a significant amount of debt, you’ll likely want to find an individual policy that would help you cover your most important bills during your benefit period.
How much does disability insurance cost?
It’s hard to judge whether disability insurance is worth the cost without knowing, well, how much disability insurance costs. There are too many factors that go into your monthly premiums to give a one-size-fits-all answer, but as a very rough rule of thumb, you can usually expect to pay between 1-3% of your salary for long or short term disability coverage.
For more information about Disability Insurance call JCT Insurance Agency at (626)354-2000 or email jctfinancialsvc@gmail.com