If you work in an injury-prone profession, getting disability insurance is a good decision. But what about everyone else? Here's how to know if you should get disability insurance.
People often take for granted just how dependent they are on a steady income. Even if you're not living paycheck to paycheck, it wouldn't take long for anyone's finances to dry up in the absence of a salary. Because of lifestyle inflation, most people just don't have the luxury of avoiding bills and other expenses for more than a week or two - and in many cases not even that long.
So what happens if you're suddenly rendered unable to work?
When you're young and healthy imagining a situation where you can't physically work is difficult. That's why so many people eventually find themselves in a situation where their income vanishes with nothing to replace it. That can lead to a downward spiral of debt, desperation and depression.
That's the situation disability insurance can help you avoid. Here's a rundown of what you should know about disability insurance - and whether or not you actually need it.
What is disability insurance?
Disability insurance is coverage that partially replaces your income when you can't work, usually due to a physical injury or ailment. The most common reasons people use disability insurance are pregnancy, complications due to pregnancy, cancer, back pain, and digestive disorders. When a woman goes on maternity leave, she often uses her short-term disability to replace her income
There are two types of disability insurance: short-term and long-term. Short-term disability pays for three to six months. Long-term coverage protects you for a greater period of time, ranging from a couple years to the duration of your career.
Remember, disability coverage usually only replaces 60 percent of your income, so you shouldn't rely on it completely. It can also be one of the most expensive insurance policies, depending on the level of coverage, your age, income and whether or not you have the option to buy it through your employer. Short-term coverage is always more affordable than long-term, because it only needs to provide coverage for a small window of time.
Costs generally go up the older you get, as you're more likely to get hurt and rendered unable to work. In that case, it might be better to increase your emergency fund and keep saving aggressively for retirement.
Is it worth it?
Not everyone needs disability insurance. I recently spoke to an insurance broker who said I could probably avoid buying it, because as a freelance writer there is little chance I could become so disabled that I could not work at all. Even if I broke my arm, I could use voice dictation to type out my articles.
However, disability insurance is a necessity for other people - especially those in manual labor or specialized positions like a surgeon or masseuse. If you work in a injury-prone profession, you should definitely invest in disability insurance.
Disability insurance is like life insurance. If your family doesn't rely on your income, then you probably don't need to buy it. Clint Haynes CFP of NextGen Wealth said he recommends disability insurance to about half of his clients, depending on their careers and their personal situations.
"If you're the breadwinner, you better have some disability insurance," he said.
Where to buy it
If you're traditionally employed, your computer might offer disability insurance either for free or at a greatly reduced price. Some firms include a certain amount of disability coverage in their benefits package. You'll always find the best prices if you go through an employer, who has already negotiated a group rate with the insurance company.
However, people who don't have access to disability insurance through work often have to pay expensive premiums for coverage.
That's what Jackie Lam of Hey Freelance discovered when she tried to buy disability coverage on her own. The state of California already offers short-term coverage to residents, but Lam wanted something to supplement that.
"I poked around and did my own research and found that my monthly premiums would be about $350/month," she said.
That cost was too much for her. She ended up finding a more affordable policy through Freelancer's Union, a group that provides insurance plans for freelance writers, artists and more. She purchased a short-term policy for $22 a month, covering her for six months in the event of emergency.
Compare disability policies if you're looking on your own. PolicyGenius allows you to find the best insurance rates, including disability insurance.
Other options
If you can't afford disability insurance, there are other ways you can protect yourself and your family if you become unable to work.
The easiest and most common way is to save an emergency fund with at least three month's worth of expenses. If you have children, a mortgage, or are the sole provider, you should save a year's worth just to be safe.
Not sure how much your regular expenses are each month? Go through your bank and credit card statements and calculate how much you spend on the essentials. Include rent, groceries, childcare, insurance, gas, utilities, internet and pets. Don't include discretionary costs such as house cleaners, concerts or restaurants. You can live without those if you lose your job and need to cut back.
Then, add up how much you have in liquid savings. This includes your savings account or any case you have stashed in the house. Divide that amount by how much your necessary expenses cost each month to determine how many month's worth of expenses you have.
If you don't have a solid emergency fund, focus all your efforts to building one up. You never know when you might lose the ability to work; it's better to be prepared now.
Comments
Post a Comment