In my earlier working years, I wasn’t complete sold on disability income insurance.

I had good health insurance coverage, what I considered  a good portion of term life insurance coverage, and felt that I was pretty well set.

Luckily, my current firm, LPL Financial, had an awesome arrangement with a disability insurance company and I was able to get a long term disability insurance policy at a good price.

Even without the the reduced cost, I now see the importance of having a disability insurance income policy; especially as I see my family grow.

Do You Need a Long Term Disability Income Insurance Policy?

Surprising Disability Probabilities

Like I said, I knew the importance of having life insurance, but was surprised when I saw the following statistics from the Life and Health Insurance Foundation for Education, November 2005:

  • If you are between the ages of 25 and 55, you are more likely to become disabled that die.  How about them apples?

Here are two more for you:

  • 60-percent chance at ages 30, 40 and 50 that one in a group of five people will suffer a long-term disability before age 65 .
  • There is a 1 and 3 shot that before they age of 35, that will be disabled for more than 3 months during the rest of your working days.

Still don’t think you need a long term disability insurance policy? Disability insurance provides you with cash that you can use for paying your mortgage or rent, buying groceries and meeting other ongoing living expenses.

Putting Disability Insurance Policies in Perspective

For most people, there are two main forms of disability income insurance to consider: employer-sponsored policies (called “group” policies) and private insurance policies. Group policies are relatively inexpensive and generally remain in effect for as long as the individual remains with the employer.

But there are often significant limits on the benefits provided by these policies, so it’s important to determine whether coverage is adequate for your needs. I had this available to me at my old firm, but didn’t take advantage of it.

Private insurance policies, paid for by individuals, typically are more expensive than group policies but may also provide a higher level of coverage. In certain instances, those with a group policy may want to consider purchasing a private policy to fill in the income gaps frequently associated with group-only coverage.

How Much Disability Income Insurance Do You Need?

The key to determining your needs is to assess how much you would be required to spend during each week or month that you would be unable to earn your normal pay. For example, if you would need 80% of your pretax earnings but your group policy would only pay an amount equal to 60%, then you may need additional coverage.

The policy I had bought capped me off at a certain amount, but what made the policy so attractive is that it would pay the full benefit up until I was 65 or started taking Social Security benefits.  Just to make sure I was getting a good deal, I shopped around and other policies I checked paid a smaller benefit and only paid for a certain number of years (around three).  Plus, it was more expensive!  Buying my policy was a no-brainer.

Disability Defined

The way in which an insurance policy defines disability can determine your eligibility to receive benefits. The following is a quick overview of three basic definitions:

  • Own-occupation. The most comprehensive definition of disability, it states that you are unable to perform the duties of the occupation you were performing at the time of the disability.
  • Income replacement. Policies with income replacement coverage define disability as sickness or injury that doesn’t allow you to perform the duties of your occupation and typically stipulates that you are not currently engaged in any other occupation.
  • Gainful occupation. These policies define disability as the inability to perform the duties of your occupation or any occupation that you are considered to be reasonably qualified for by way of your education, skills or training.

A qualified insurance professional or disability attorney can help you assess your need for disability income insurance and find a policy that is most appropriate for you.


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Comments | 2 Responses

  1. says

    It’s impossible to predict who will become disabled at what time. That’s why having a long term disability insurance as well as good benefits is an absolute must. When I broke my leg on the job I thought I was going to be in the poor house. Then I found my service provider, and it was like a breath of fresh air.

  2. Thomas says

    One important feature of a disability policy to consider is the elimination period — that’s the time you must be disabled before the policy will pay any benefits (all policies will have an elimination period). Sometimes this is referred to as a deductible. Like any insurance, policies with smaller deductibles (in this case, shorter elimination periods) have higher premiums. So when calculating your disability odds, the question really is “What are the chances of me being disabled for at least two weeks? one month? six months? …. or whatever the elimination period is.” A corollary to this is “What kind of personal resources do I have that will cover my expenses if I’m disabled?” The answer to that gives you an idea of the length of elimination period you can endure financially without insurance benefits. If you have a rainy day fund set aside, you can explore longer elimination period/less expensive policies. If not, then you’ll need to select a more costly policy with a shorter elimination period. Of course, everyone has different financial needs, risk tolerance, etc.

    Lastly, if you are disabled, your spending patterns will change — probably higher medical bills, more therapy, retraining for a new job, etc. In many cases, your medical expense policy won’t fully cover those all of those new expenses. Keep that in mind when selecting an appropriate level of benefits. Sometimes just covering your current expenses isn’t enough.

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