Disability insurance may not be top of mind for every Grownup, but financial planner Matt Becker shows why it can be a smart investment.
As a financial planner, I find my clients often ask me:
- How do I save and invest for retirement?
- Should I rent or buy a house?
- How much life insurance do I need?
- How do I pay off my debt?
But one big topic—disability insurance—is never, ever on that list.
It’s just not something that most people think about. But I almost always encourage my clients to get disability insurance, no matter how healthy they are right now.
Here’s why I recommend it to my clients, and what you can look for in a good policy if you decide it’s right for you.
Protect Your Most Valuable Asset
As a young professional, your biggest financial asset is your future income.
The money you make going forward will be used to pay your bills, save for the future, and create the freedom to pursue your own version of happiness.
And while it’s not fun to think about it, there are things that could prevent you from earning that income and make it harder to reach the goals you care about most.
According to WebMD, one in three people will experience some kind of disability before they retire, and the most common causes of disability are not what you would guess:
- Back pain
- Heart disease
I don’t mean to sound morbid, but the truth is that we are all susceptible to those ailments and others. So, if there’s a way to protect your biggest financial asset, it’s worth considering.
How Does Disability Insurance Work?
Disability insurance kicks in if a sickness or injury renders you unable to work, sending you a monthly check that replaces a portion of your income.
Short-term disability insurance typically covers the first 60 to 180 days of disability and is often an option in your employee benefits. Alternatively, your own emergency funds may be able to cover (at least partially) these short-term needs.
Long-term disability insurance typically doesn’t kick in until you’ve been disabled beyond an “elimination period” of 30 days or longer, but will continue to send you a monthly check for your entire benefit period as long as you are still disabled.
And it’s the long-term coverage that typically offers the most value. If you were unable to work for an extended period of time due to sickness or injury, those monthly checks can help you pay your bills and continue saving for the future.
In other words, long-term disability insurance protects your biggest financial asset from its biggest risk—loss of income.
Know What to Look for in a Disability Insurance Policy
Here are some of the major variables I consider when reviewing disability insurance policies for my clients.
Who Owns the Disability Insurance Policy?
Are you getting the policy through work or are you buying it on your own? Group coverage is often more affordable, but individual policies have other advantages, which I’ll discuss later.
What’s the Monthly Benefit?
This is the amount the disability insurance policy would pay you each month in the event of disability.
Taxes are a big variable to keep in mind here. With an individual policy, your benefit will almost always be tax-free. But in most cases the benefit you get from an employer plan will be taxed if the employer pays the premium, which reduces your actual take-home amount.
What’s the Benefit Period?
The benefit period is the amount of time that the policy will continue to pay while you remain disabled. Your policy may have a maximum payout period of a few years, or it may pay out until age 65 or 67, even if that ends up being several decades away.
What’s the Definition of Disability?
Each disability insurance policy has a different definition of disability that determines when the policy will and will not pay out.
For example, some policies define disability as the inability to perform any kind of paid work. Other policies define disability as the inability to perform the normal tasks of your current job, which means that even if you’re able to return to work in a different role, you could still receive payments.
There is a wide range of possibilities here, so I always pay close attention to the specific language in the policies I review for my clients.
Are There Any Exclusions?
No matter what the definition of disability is, your policy may exclude certain conditions from coverage. The rule of thumb to remember: The more that’s excluded, the less valuable the policy.
What’s the Premium?
Ah yes, this insurance is going to cost money! No fun.
Disability income insurance can be fairly expensive, so I try to find a balance between the cost of the policy and the potential benefit.
Is There an Elimination Period?
This is the amount of time you must be disabled before the policy starts to make payments. This can be anywhere from 30 days to a year. Here, you can always remember: The longer the elimination period, the cheaper the policy.
A good emergency fund can allow you to extend the elimination period and make the long-term protection more affordable. If you have a decent emergency fund, you can plan to use that money in the event that you can’t work, and extend your elimination period to save on your disability insurance policy’s premium now.
Is This Disability Insurance Policy Portable?
One of the biggest benefits of an individual policy is you can take it with you wherever you go. No matter where you work in the future, your insurance will be there as long as you pay the premiums.
That’s usually not the case with employer coverage. If you leave the company or if your employer decides to cancel the insurance, you could find yourself without protection.
Is There a Premium Guarantee?
A non-cancellable policy is one where the insurance company cannot cancel the policy before age 65 or raise the premiums as long as you continue to pay them on time.
A guaranteed renewable policy can’t be canceled, but the premiums can be raised.
Is There a Future Purchase Option?
Many policies offer you an option of increasing your coverage later without having to go through another medical exam. This allows you to ensure that your coverage can keep pace as your income increases.
Know When Disability Insurance is Worth the Cost
For my young professional clients, long-term disability insurance typically makes a lot of sense. With so many years of income ahead of them, the protection this coverage offers is well worth it.
Matt Becker is the founder of Mom and Dad Money, a fee-only financial planning practice dedicated to helping new parents build happy families by making money simple. His free time is spent jumping on beds and building block towers with his two awesome boys.
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