Do You Need Disability Insurance?

Lack of long-term disability insurance is one of the most common issues I see in my practice.

First, please note that I don’t sell disability insurance.  I’m a fee only financial planner, so I don’t receive any commissions on insurance or other products I recommend. My interest is in helping my clients make the best financial decisions for their lives.

Second, I’m licensed to provide insurance advice and help people figure out what kind of policy they need in the state of Texas.  So if you don’t live in Texas, this isn’t directed at you.

Why is disability insurance important?

For most of us our ability to earn an income is our single biggest asset.  This remains true until late in our careers.  But most of us are far more likely to have life insurance than adequate disability insurance — and the odds of needing disability insurance are far greater:

  • The Social Security Administration estimates that a 20-year-old worker has a 3 in 10 chance of becoming disabled before reaching retirement age. (Social Security Disability Benefits, SSA Publication Number 05-10029, November 2008)
  • There were more than 7 million disabled workers in 2008 receiving Social Security disability benefits. (Fact Sheet On The Old-Age, Survivors And Disability Insurance Program, Social Security Administration, July 2, 2008)
  • So, how do you know if you need disability insurance?

    There are two kinds of disability insurance — short term and long term.

    You need short-term disability if you don’t have an adequate emergency fund that would cover your expenses until long-term disability started paying.  If you determine you need short-term disability, first look at your employer benefits.  Your company may be providing it to you already, or you may have enough built-up vacation time that you don’t need any additional income during the first 3 to 6 months of a disability.  If none of these are true, then you either need to build an emergency fund or get short-term disability.   Check with your employer to see if it’s available through them before you look to purchase it privately because group policies are usually less expensive.

    Once you’ve got the short-term question answered, then you need to look at long-term disability.  This is the area I see most people lacking in.  Long-term disability starts after a waiting period of usually 3 to 6 months and policies can provide benefits for as little as 2 years to as much as age 67.

    To determine how much long-term disability coverage you need, you need to figure out how much of your income you or your family would still need in the event of your disability.  If you have two earners in the household but only need one income for your ongoing expenses, you might decide to forego the expense of disability insurance.  However, most people would need at least part of their income replaced to continue paying their bills.

    After you’ve determined whether you need long-term disability, look at your options.  Do you already have it through your employer?  As with short-term, getting long-term disability through your employer will usually be less costly than purchasing it through a private insurer.  And sometimes employers even provide it as a benefit at no cost to the employee.

    If you already have it or have access to it, then assess whether it’s adequate for your needs.  Insurance policies vary dramatically in terms of how they define disability, elmination periods, benefit periods, whether you can go back to work part-time and still receive partial benefits, and more.  The benefits can also be taxable or tax-free depending on how the premiums were paid.  So it’s important to look closely at what you have and really understand the level of coverage in relationship to your individual needs.

    You should also be aware of some other benefits you may already have:

    Social Security: Although you shouldn’t overlook the disability benefits you may be eligible to receive from Social Security, you shouldn’t rely on them exclusively, either. Social Security denies many claims, in part due to its strict definition of disability. Even if you are deemed eligible for benefits, you still won’t begin receiving them until at least six months after you become disabled because Social Security imposes a waiting period. In addition, your benefit may replace only a fraction of your predisability income.

    Workers’ compensation: If you’re injured at work or get sick from job-related causes, you may receive some disability benefits from workers’ compensation insurance.  When you review your disability income insurance needs, remember that workers’ compensation pays benefits only if your disability is work related, so it offers only limited disability protection.  Also note: employers in Texas are not required to provide workers compensation insurance.  For more information on Texas-specific workers compensation laws, visit the Texas Department of Insurance website.

    Pension plans: Some government and private pension plans pay disability benefits. Often, these plans pay benefits based on total, permanent disability, or reduce your retirement benefit in proportion to what you have already received for a disability. In addition, remember that these benefits are usually integrated with Social Security or workers’ compensation, so your benefit may be less than you expect if you also receive disability income from these government sources.

    About the author

    Jean Keener, CRPC®, CFDP®

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