Many of us think of the “big four” when it comes to insurance: home, life, health, and auto. These insurance policies are designed to protect you and your family from an expensive financial disaster, whether it’s a hospital stay or your house burning down. What many of us forget to consider, though, is whether or not we also need a disability insurance policy.
What is disability insurance?
Disability insurance protects you in the event that you are unable to work and provide for your family due to an injury or illness, such as a car accident that keeps you in the hospital for months or a year spent battling cancer. There are two main types:
- Short-term disability insurance is designed for temporary situations. It’s usually limited to payouts for a few months—until you can recover and get back to work.
- Long-term disability insurance, on the other hand, is designed for those who might need more permanent help. If you are permanently disabled or have a terminal illness, long-term disability will pay out indefinitely in some cases (but not all, so check the policy terms).
Disability insurance covers an illness or injury that keeps you from working as a result of situations that arise that aren’t related to work. (Work injuries are covered by worker’s compensation insurance, which is paid for by an employer.)
It’s important to note that disability insurance is income replacement and is not meant for treatment. Your health insurer should pay for treatment, but it won’t pay to replace your lost income—disability can help with that. Additionally, if someone else causes an accident that puts you in the hospital, that person’s insurance may pay for costs, which can include missed wages.
Should you get disability insurance?
Whether or not you should get disability insurance depends, in large part, on your individual situation and your needs. It often makes sense for the primary breadwinner to have some degree of disability coverage.
However, if you can save up enough money to cover six months’ worth of expenses, you may be able to self-insure with your emergency fund and therefore you might not need short-term disability insurance. You may still want to consider long-term disability, though, just in case something happens that keeps you from returning to work ever again.
Many companies offer disability insurance to employees at a reasonable cost. You can also check with your bank, as some financial institutions offer limited policies fairly inexpensively. You might even qualify for a small amount of coverage at no cost to you.
Keep in mind that policies might only pay out between 50 percent and 75 percent of your salary, so you probably won’t get enough to completely replace your income. However, this can still go a long way in helping you stay solvent during a tough time. Also, pay attention to lifetime payout limits (many were eliminated under the Affordable Care Act in 2012), and check into what you can expect in terms of a waiting period. Some policies require that you are sick or injured for at least 30 days before they begin paying out.
Disability insurance makes sense because it provides peace of mind and offers a backup source of income during times when illness or injury prevents you from working. Check into your options to determine what would work best for you.
Miranda Marquit is a freelance writer and professional blogger specializing in personal finance, family finance and business topics. She writes for several online and offline publications. Miranda is the co-author of Community 101: How to Grow an Online Community, and the writer behind PlantingMoneySeeds.com.