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Benefits of Disability Insurance


  • Published: 2008-12-21 (Revised/Updated 2010-06-30) : Author: Bernard B.
  • Synopsis: According to MetLife 80% of working Americans are not covered or do not have any disability income insurance.

Disability insurance has been labeled as another "necessary evil." However, many don't even feel it's necessary. They just see it as evil.

So why do I own disability insurance

It's simple. Just like life insurance, I am transferring the risk from me to someone, or something, else.

Comedian Jerry Seinfeld has a bit that I like to relate to this topic. He wonders about the purpose of the helmet when skydiving:

What is the point of the helmet? If that chute doesn't open, the helmet is wearing you for protection.

According to MetLife, more than 80% of working Americans aren't covered adequately or don't have any disability income insurance. So, 80% only have a helmet or nothing at all!

So why are so many individuals uninsured or not covered adequately? Here are some frequent responses:

I don't need it.

You're probably right. You don't need it. But would you want it? By not having it, you are putting your assets at risk because they would have to cushion the financial blow. And remember, there is no such thing as self-insurance. You are either insured or not. Getting insurance allows you to enjoy your assets without risking them due to disability.

Studies show that a 20-year-old worker has a 3-in-10 chance of becoming disabled before reaching retirement age. Why carry that risk

I can depend on Social Security.

Per our federal government website: "Social Security pays only for total disability. No benefits are payable for partial disability or for short-term disability."

So what does that mean

Let's say you are a doctor and you injure your right hand. The injury prohibits you from doing surgeries. You can't get disability via Social Security because you are able to adjust to other occupations, like car sales.

"Disability" under Social Security is based on your inability to work. So if you can work in any capacity, chances are you won't get disability income. Also, they use "other" factors to determine if you even qualify for coverage. Your chances of becoming disabled may be greater than your chances of getting coverage.

I can use my emergency fund.

The purpose of your emergency fund is for emergencies. But when it comes to disability, that's of a different kind. This fund is for things like immediate car repairs, air conditioner breaks down, temporary unemployment, etc.

Remember, an emergency fund is supposed to keep you afloat for only a few months (i.e. 3 months, 6 months, 12 months). Long term disability can deplete your savings in one fail swoop. An emergency fund is calculated using your current monthly expenses. But even with short term disability, your expenses have the potential to skyrocket.

I have Group Long-Term Disability (LTD) at work.

A company's long term group disability coverage usually only covers 50% of your earnings. Can you and your family live on half of your current income? And even if you could, would you really want to? Again, your expenses are likely to increase because of your disability. These plans typically exclude bonuses and overtime pay. Also, the benefits are generally taxable. This means that your half salary can shrink even more.

So, what now? If you are beginning to see value of disability insurance now and don't have it or feel you lack sufficient coverage, I suggest:

Get educated.

If you are still unsure, get more information. In the beginning, I got a little education from my financial planner. He showed me the importance of having disability insurance. He also showed me how my company's coverage was insufficient. So, I suggest meeting with your financial planner or a licensed agent in order to get better educated on the benefits of these policies.

Buy young.

I bought my first private disability insurance policy at age 24. I bought it at a young age so my insurability wouldn't be an issue. Be sure to have a long wait period. Along with buying the policy at an early age, this will make the premiums more affordable.

Have a strong definition of disability.

When you sign for your policy, ensure that your definition of disability is your "own occupation." This means that you are covered if you are not able to perform substantial duties of your occupation because of your disability. It doesn't matter if you are able to adjust to another job.

Keep it.

As long as you keep paying the premiums, you own the policy. It's portable. One of the drawbacks with group LTD at your employer is that coverage ends once you leave or the policy is terminated. With a private policy, you are covered no matter what your employment situation is.

If you become disabled, your benefits will be paid to you tax free. Why? Because you paid for the premiums with after tax dollars. So, it doesn't matter what your tax bracket is. Uncle Sam can't cash in on your disability income.

Private disability insurance is very important to our financial plan. It protects us and our assets.

So the question is, do you have a helmet or a parachute when going through the risks of life? Or, are your assets wearing you for protection

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