To Buy or Not to Buy: The Case for Long Term Disability Insurance
Welcome to the world of adulting, where every decision seems to have a weighty financial consequence, but the outcomes are never certain. Amidst the financial maze, disability insurance is one of those topics that can be easily brushed off as something you'll think about later. However, in reality, it's a crucial aspect of your financial stability.
Disability insurance provides income replacement if you become unable to work due to illness or injury. Like life insurance, it also protects your family against financial hardship from the loss of your stream of income. Despite the importance of maintaining financial stability, many folks lack adequate coverage to defend against the risk of disability.
So, how can you determine if it's a worthwhile investment for you? Here are a few points to consider:
1. Your Job and Financial Stability
If your job is physically demanding or high-risk, you might already be aware of the need for disability insurance. My wife is a surgeon. She has invested a tremendous amount of time and money into developing highly specified medical knowledge and skills. If she were to lose dexterity in her hands or develop back-pain that kept her from operating, she would no longer be able to do her job. But even if you have a desk job, accidents and illnesses can happen to anyone. Before deciding, take stock of your job's demands and your overall financial stability.
2. Your Lifestyle and Dependents
Consider your lifestyle and dependents. If you're single and have no one relying on your income, you might have fewer obligations to meet if you're unable to work. But if you have a family or other dependents, ensuring you can provide for them is likely a greater priority.
3. Emergency Savings vs. Insurance
Everyone should have an emergency fund that could cover at least three to six months of living expenses. This is a great foundation. If you have a good emergency fund, you probably don’t need a short-term disability policy. But what if you're out of work for longer than that? Long-term disability insurance could be a safety net to complement your emergency fund. Most policies will continue to pay you until you’re eligible for Social Security if you remain disabled.
4. Your Current Health and Age
Premiums for disability insurance are typically lower when you're younger and healthier. If you wait until you're older or have developed health conditions, you might face higher premiums or even be denied coverage.
5. Government Benefits
If you have paid into Social Security for long enough, you may qualify for some benefits if you become disabled after a five-month waiting period. But, like Social Security benefits in retirement, the benefit you’ll receive is not enough to live on. How You Qualify | Disability Benefits | SSA
6. The Details of the Policy
Not all disability insurance policies are the same. There are various types of policies, and each has its own set of conditions and exclusions. Be sure to understand the terms, including the waiting period before benefits kick in, the duration of benefits, whether the premiums can change, the definition of disability used, and how it will be taxed. Check out our post on the most important terms: Key Issues When Evaluating Disability Insurance Policies — Oakleigh Wealth Services
7. Peace of Mind
Ultimately, disability insurance can provide peace of mind. Knowing you have a financial safety net if the unexpected occurs can alleviate stress and help you focus on your recovery.
There's no "right answer." There are other important things to consider when weighing how much coverage you want, including whether you would have family support, your partner could bring in more income, or if you could live with cuts to your living standard if needed. These are very personal decisions.
