I talk a lot on here about the importance of building a secure financial base for my family. Sure I want to work towards financial freedom, and doing so takes some risk, but first and foremost I want to do everything I can to make sure my family always has the financial resources it needs.
Building that secure base means wading into some topics that maybe aren’t the most enjoyable to think about, but are incredibly important.
Disability insurance is right at the top of that list.
What is disability insurance?
In return for your regular premium, disability insurance will replace some of your income if you’re ever in a position where you cannot work due to disability. In other words, it protects your ability to earn an income even if your health prevents you from doing so.
The definition of “disability” can vary greatly from policy to policy. I’ll get into this a little more in next week’s follow-up post on what to consider when purchasing a policy, but it’s important to understand that the definition is very important. As an example, Social Security defines disability as:
- You cannot do work that you did before;
- We decide that you cannot adjust to other work because of your medical condition(s); and
- Your disability has lasted or is expected to last for at least one year or to result in death.
In other words, it only pays out if you cannot do ANY kind of work AND the disability is either expected to last for one year or result in death. This only covers rare situations, and many private policies will have a much more inclusive, and therefore useful, definition.
It’s also important to distinguish between short-term and long-term disability insurance. The difference is exactly what is sounds like. Short-term disability insurance will only cover you for short periods of time. In my opinion, this is something that’s better handled by an emergency fund rather than insurance.
Long-term disability is where the real value is. It will pay you monthly income in the event that you’re unable to work for long periods of time, from several months up to several decades. This is where your real risk lies. For the rest of this article and in follow-up articles, I’ll be discussing long-term disability insurance only.
Why is disability insurance important?
Unless you’re already fully financially independent, you rely on your income to provide for both your day-to-day financial needs and your long-term financial security. Without an income, most of us would have trouble paying our bills once our emergency fund was exhausted, and the idea of building up a retirement fund would be lost.
And particularly for younger workers, who haven’t yet built up a large amount of savings, your income-earning ability is your single greatest financial asset. It’s the foundation of everything you want to do financially for the rest of your life.
All of this means that protecting our ability to earn that income is critically important.
One last point to consider is that if you were to become disabled, not only might you lose your ability to earn money (or each as much money as you did before), but you might actually start incurring additional expenses in order to manage your new health condition. All the more reason to make sure you have a certain amount of money you KNOW would be coming in.
Who needs disability insurance?
If you already have enough money to live on for the rest of your life, you probably don’t need disability insurance.
If you still have a need for income, then you have a need for disability insurance.
Unlike with life insurance, this isn’t something that you only need once you have dependents. Whether you’re single, married or have kids is pretty much irrelevant. As long as someone relies on your income, including you, then there’s a need to protect your ability to earn that income.
Furthermore, disability is more common than most people think. According to WebMD, your odds of becoming disabled for some period of time before you retire are about 1 in 3. And while most people think of disability as the result of something like a car accident, the same WebMD article lists the most common reasons for disability as:
- Back pain
- Heart disease
These are chronic conditions that have nothing to do with the kind of sudden injury that most people imagine when they think of disability. If one of these conditions prevented you from working, or forced you into a lower-paying job, or fewer hours, how would you cope financially?
There are certainly several different ways to answer that question, but the regular income provided by a good long-term disability policy would make the financial side of things a lot easier.
Next week: things to consider when purchasing a disability insurance policy
This kind of topic certainly isn’t the most enjoyable to write or read about, but I talk about it because it’s important. We all certainly hope we go through our lives without ever having to deal with something like a prolonged disability, but the reality is that it happens.
If we’re sincere about our desire to build a secure financial base for ourselves and our family, then disability insurance is a critical part of that base.
To learn more, check out my follow-up post on what to look for when purchasing a disability insurance policy.