Disability Insurance: Why You Probably Need It

The Life and Health Insurance Foundation for Education makes this declaration annually, but the average person could miss it (start planning ahead for Life Insurance Awareness Month, which comes in September).  Kidding aside, the occasion prompted me to realize that I haven’t ever written about disability insurance, which most people understand only vaguely.

Life insurance is something you probably don’t need if you’re single and have no dependents. But if you become unable to work, you still need money to live whether you have dependents or not.  One way to provide for that need is insurance.

If you’re under 60, your statistical risk of experiencing a disability is pretty substantial.  Perusing the risk management textbook I used in my financial planning courses, I was able to find some relevant mortality and disability data.  One way to think about disability insurance is to compare the risk of dying with the risk of being disabled for at least 90 days. A 25-year-old has a 24% chance of dying before the age of 65; the same person has a 54% chance of being disabled. A 40-year-old has a 21% chance of dying before 65, but a 48% chance of disability.  Until you reach your late 50s, the risk of suffering a disability is always higher than the risk of dying.  For these reasons, disability coverage can be a greater need than life insurance.  Many people consider the risk and financial consequences of death to be large enough to justify life insurance, but few recognize that they may face a higher statistical risk of becoming disabled than of dying.

When the consequences and probability of a loss are significant and the cost of insurance is relatively low, insurance is often a smart idea.  If you don’t have the resources to get through an extended period without work – according to the 1998 Commissioners Disability Table, one in seven workers will be disabled for five years or more before retirement – you probably need disability insurance.  If you have emergency funds, family members, or other resources that would support you during an extended disability, then you might not need disability insurance.

Why Social Security Disability Insurance may not be enough
Those who’ve paid into the Social Security system may be eligible for Social Security Disability Insurance (SSDI) benefits if they’re disabled.  But the qualification rules for SSDI benefits are very strict:  in order to qualify under SSDI a disability must be expected to last for more than a year or to lead to death.  Fewer than 40% of SSDI benefit applications are approved, and even people who are genuinely disabled must sometimes go through a lengthy appeal process before receiving benefits.  A person could be genuinely disabled for a year and still fail to qualify.  So SSDI can only be relied on in the most severe cases.  SSDI benefits are also not adequate to replace the income of a high-earning individual; the most that a household can receive under SSDI is less than about $4,000 a month.

So every person who works for a living should at least consider the question of whether he or she needs some form of disability insurance.  In my next post I’ll discuss the different kinds of coverage available.

About the author

Thomas Fisher, CFP®

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