Life Events

Adequacy of Disability Insurance

Unless you made a fortune the old-fashioned way (inheritance) and you are now independently wealthy, you have to consider whether you have adequate protection against a long-term disability. A recent study showed that most active workers have not done any planning in regard to this need. People insure almost everything else; houses, lives, car, medical care, dentistry, and then ignore insuring their most valuable asset. That asset is the income-earning potential that you have between now and the day you stop working, including value which gets added to your pension benefit for retirement. What would happen to that income earning potential if you developed a debilitating disease, got trampled by a moose, or run over by a bus? You need to quantify how long your available cash, savings and other household savings would take care of you in the event of an unexpected disease or accident.

A Need That Is Real

Statistics show that a 20 year old worker has about a 30% chance of experiencing a disability sometime before retirement. Most of these disabilities will be of a limited duration, others will be long-term, some will be permanent. Many will last long enough to exhaust the entire savings and ability to borrow of an average worker. This risk could possibly be borne by a single person who has no dependents. But if you are married or have dependents, you need to evaluate your current coverage for long-term disability, and determine how much more you might need to be protected.

What are the sources for disability coverage you may already have?

  • Emergency cash and savings.
  • Individual insurance already owned.
  • Social Security provides coverage for permanent disability, but you have to be totally and permanently disabled from any gainful employment.
  • Workers compensation provides a limited amount of disability coverage for injuries sustained in the course of your work.
  • Employer-sponsored long term disability insurance coverage

Unless you are nearing retirement and can rely on your pension in case of a disability, you need to give serious thought to obtaining individual disability insurance. The main factors which determine the cost of this insurance and considerations include these:

  • How much insurance? This is analyzed in terms of a percentage of your income. Most workers should target replacing 50-70% of their take home pay.
  • How long is the waiting period after you become disabled and before the benefit starts being paid? You should select the longest period available that you can afford. This can really help to keep the cost more affordable.
  • How long are benefits payable? Five years, to age 65, for life? You should select the longest period you can afford.
  • The type of disability policy that you have. The disability policy will generally either provide coverage for disability which prevents you working in your "own occupation", or "any occupation." "Own occupation coverage" is generally better coverage, but it is also generally more expensive.