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Should you Buy Disability Insurance

A few weeks ago I was in California on business traveling back across the San Mateo Bridge.  I’m moving at a good clip in wall-to-wall traffic at a pace near 60 mph when suddenly out of the corner of my eye I noted a motorcycle passing through my lane between me and the person in the lane next door.  My life and the life of the Harley rider flashed before my eyes as I contemplated what could have happened should I have shifted just 2 feet to the left in my lane.  It got me thinking, how close we are every day to a catastrophic disability causing injury and the importance of disability insurance.

You Don’t Control All Risks to Your Health

Now, mind you obviously the rider was nuts to pass between 2 cars doing 60 probably approaching 90 mph.  But I as the driver had no influence on the decision to take that risk.  Just a foot either way and the bike rider wouldn’t have been the only person to get hurt.    No matter how cautious I am, there is always a risk something outside my control could harm me.  

That is before we even talk about the risk of medical problems.  Illness’ is fairly indiscriminate.  It doesn’t matter how much you work out or eat healthily, you could still experience a major health event.    There is no guarantee after such an event you will still be able to work.  We’re all just one unplanned event away from losing our income.  Which is why you should always be prepared for such an issue with disability insurance.

Young and Invincible, Not So Much

I know, you’re young and invincible.  You think I work out it can’t possibly happen to me.  Well, I hate to tell you but such events don’t just target unhealthy people.   You never know, and especially with a young family, living without a backup plan is like gambling with your future.  I use to think I didn’t need such a plan.  Frankly, I have never had disability insurance beyond the default available from my employer.  I never really thought about what would happen should the worst occur.  But as the years go by I’ve realized I was wrong.  You need to be prepared.    

What is Disability Insurance?

Disability insurance is insurance that covers your loss of income due to disability.  It’s of value to anyone who needs their income to survive and thus needs to mitigate the risk of potentially losing that income. The plan essentially pays you a portion of your income each month as a replacement.  It can be purchased with two types of coverage.  

Short Term Disability Insurance

The first is short term disability insurance.  This covers a short period of a few weeks to a few months.  These plans can typically be used to cover the waiting period before the second type of disability insurance kicks in.  I don’t think there is much of an aftermarket for short term disability outside of employer coverage.  In any case, it mitigates a limited risk that can just as easily be covered by an emergency fund.  As such I personally would not purchase short term coverage.

Long Term Disability Insurance, You Should Have This Coverage

Meanwhile, Long term disability insurance typically has a delayed start but can last a lifetime. As we’ve discussed before its the uncapped risks you should be mitigating.  If you have an injury that ends your career, that is an uncapped risk as it entails all your future income.  So obviously you want long term disability insurance, but there are still other decisions to make on types of coverage so keep reading.

Available Features of Long Term Disability Insurance

Within long term, the key feature you are looking to understand is the coverage of occupation.   The best albeit most expensive option is for the insurance to cover own occupation.  This means if you get disabled and cannot do your existing job the plan will payout.  Less expensive but less valuable is any occupation insurance.  This means it will pay out only if you can’t get any job due to your disability.  Obviously, this is less advantageous if you have to shift from a high paying job to a low paying job for a disability since you will then receive no plan benefit.  If you are buying you probably should spring for own occupation. 

Employer Offerings of Long Term Disability Insurance

 Most employers only offer any occupation, which is one reason it’s probably a good idea to buy at least some coverage on the open market to supplement your employer care.  Another reason is your employer could drop your coverage should you need to leave work for some reason.  IE. you could end up without coverage when you need it most due to layoff or another issue.  By purchasing your own plan you can do things like lock-in cost with inflation riders, guaranteed renewal, and ensure you get the correct coverage for you.  In this way, you will never be in danger of losing coverage.

Waiting and Coverage Periods

Long term plans regardless of source usually cover a percentage of your income. They also tend to have both a waiting period and a coverage period.  Many long term care plans don’t kick in until after you’ve been disabled for a month to even as much as a year (usually the period the short term care coverage is active).  Then they can last any period from one year to a lifetime.  Needless to say, you want to cover your salary for as long as you need it to support your family.  The waiting period would be less of a concern provided you have an adequate emergency fund.

My (Lack) of Disability Insurance

So what about our coverage today?   Currently, I still do not have disability insurance except through my employer.  This is solely because my assets are now into the realm of self-insurance.   If I were to lose my job due to my health my family should, in theory, be fine without my income due to my wife business and our existing assets.     This is a calculated mitigated risk because a loss of my income would not be a major issue.  But I also realize looking back how foolish I was to not have more than the minimum protecting my future before I could self insure.  Don’t be me as you may not be as lucky.

Do you have disability insurance?  Is it the employer bare minimum or more?

3 Comments

  1. Xrayvsn
    Xrayvsn January 24, 2019

    As a physician it was really important to get disability insurance in the early years as you have accumulated so much debt that doesn’t get discharged with bankruptcy (only death) and thus if you became disabled and unable to earn the expected income you can really be stuck in a bind.

    Some important things to check for disability insurance, especially for physicians is occupation specific clauses. If I am a radiologist and became disabled I do not want them to say well you could practice in some manner as a doc in some other specialty and thus we won’t cover you.

    As you approach FI the need greatly diminishes to continue with disability insurance coverage but early on it is vital to cover your bases with it.

  2. Mr. 39 Months
    Mr. 39 Months January 28, 2019

    I am sort of in your boat. I had my own disability insurance earlier in life (in addition to work) but now I only have work disability, since I am pretty close to FI and can self-insure.

    Still, its an important topic – folks are 5X as likely to get disabled as they are to die.

    • FullTimeFinance
      FullTimeFinance January 28, 2019

      With the probabilities though so many people just ignore the possibility.

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