Is Disability Income Insurance Worth It?

By Kristina Smith

Editor’s Note: You insure your most valuable assets like your home, your car, and your life. Most people would agree that they’re worth protection; however, disability income (DI) insurance is something people tend to be less certain about. They’re not sure if they really need it, or if it’s worth the cost. So, the question is: Should you protect your income?

What are the chances that you need income protection?

When you think about the kinds of disability that could keep you from working, usually the first thing that comes to mind is a car accident or other catastrophic injury — in other words, something that could happen, but most likely won’t.

In reality, the most common cause of disability is illness, not accidents or injuries.

According to Fred Schott from The Council for Disability Awareness:

- - - - “The top reason for short-term disability has been pregnancy, although that’s been drifting downward over the past ten years to less than one in four, due to declining birth rates.”
        
        And “the next most common: musculoskeletal disorders — things like back, spine, hip, and shoulder problems. About one in five short-term disabilities are a result of that. And in most cases that’s usually the result of some kind of a surgery or other medical procedure to treat the underlying musculoskeletal condition. A classic example: somebody’s got hip arthritis, and they need a hip replacement.”

Longer-term (three to six months or longer) disabilities trend a little differently, according to Schott:

- - - - “Far and away the most common reason — approaching almost three in ten people — are musculoskeletal conditions.
        
        “And then the next category, coming in at about 15 percent, is cancer.
        
        “And behind those two, you have the recoveries from heart attack, stroke, neurological disorders.”

The incidence of disabilities that put you out of work are more common than you might think. In fact, one in four 20-year-olds will become disabled before they reach retirement age, according to the Social Security Administration.² You probably know someone who’s had to take time off from work for medical reasons, even if it’s not permanent.

What is disability income insurance?

Disability insurance, when you boil it down, is insurance for a portion of your income. And your income — more than your car, or home or any other big ticket item — is your most valuable asset. It’s what pays for your essential expenses like housing, food, utilities, clothing, transportation, as well as your not-so-essential ones. Your income may help support members of your family, too. Think: tuition, childcare, and medical bills.

Even if you don’t think of your annual salary as particularly large, over a lifetime it adds up. For example, a 35-year-old making $50,000 a year will make $1.5 million between now and retirement at age 65. And that’s not even accounting for the occasional raise or bonus. (Disability calculator)

If you had to stop working due to a disability, the income you’re earning now simply wouldn’t be there anymore. You’d have to find another way to cover your living expenses and to support the people who depend on you. That’s where DI comes into play.

What about other options?

Of course, there are a few other sources of income you might be able to draw on if you become disabled. Many people have what’s called group long-term disability insurance through their employer. This can be a helpful benefit, but there are some important things to remember.

First, if you leave for another job, you probably will not be able to take your disability coverage with you and your new employer may or may not provide the same benefit.

Second, if your employer pays for the policy, the benefits you would receive if you became disabled would be taxable.

Most important, the kind of disability insurance you get from work typically only covers about 40 percent to 70 percent of your income, not including any bonuses or commissions you may normally receive. The balance is up to you.

You might be thinking that there’s always savings. If you have enough money in the bank to cover your living expenses for more than a month or two, you’re in better shape than the large majority of Americans. If you don’t, you’d need to consider another option. Also keep in mind that the average disability lasts a lot longer than the one-to-two month range. Most people’s savings would run out long before that.

Can I afford disability insurance?

When you’re already paying for other kinds of insurance — home, auto, life — it’s hard to think about buying more. But a good way to frame it is what disability insurance costs versus what the benefit would be if you used it.

Here’s a hypothetical: Say a 30-year-old man, taking home $56,250 a year buys a disability insurance policy that costs him $929 per year. (By comparison he could be spending $985 a year on a daily coffee, assuming an average price of $2.70.³)

If he becomes totally disabled, after a 90-day waiting period he could receive $4,050 a month over 12 months, replacing about 86 percent of his pre-disability, after-tax income — and hopefully allowing him to keep up his coffee habit.

There are, of course, some limitations and eligibility requirements for DI. So, in the end, it’s a matter of whether you feel like the benefit you could receive outweighs the cost of premiums and the uncertainty that comes with not having any coverage at all. Costs and benefits vary from policy to policy.

Protecting your most valuable asset

With any luck, you’ll never have to deal with a disability that keeps you from being able to work. But it’s a good idea to have a plan in place, so that if you ever did become disabled you could still cover your expenses and provide for the people who count on you.

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^{1 Council for Disability Awareness, “Chances of disability,” March 28, 2018.}

^{2 Social Security Administration, Fact sheet..}

^{3 Square, “States Where You Can Find the Cheapest Cup of Coffee,” Sept. 29, 2015.}