Insurance can be a bit of a paradox. You do your research, shop around, and make the financial commitment, all while hoping you never have to actually use it. Beyond the realms of health and auto coverage, many people also secure life insurance, a safety net for their loved ones in the event of their passing. For those of us who are budget-conscious, term life insurance is often the go-to choice. It’s relatively affordable because many policyholders never need to file a claim. Insurance companies invest those premiums, generating substantial profits, and ultimately pay out less than they receive.
But here’s a harsh reality: modern medical advancements mean that an accident or illness that would have been fatal a decade ago might now leave you disabled—alive, but unable to work. Unfortunately, many of us will need disability income protection at some point before we reach retirement age. Statistics indicate that roughly one in four of today’s 20-year-olds will experience a disabling condition that lasts at least a year before turning 65. Without adequate insurance, a disability can quickly lead to financial ruin. A recent study published in the American Journal of Public Health revealed that a staggering 66.5% of all U.S. bankruptcies (approximately 530,000 households annually) stem from medical issues, whether due to high healthcare costs, lost income, or both.
Why Disability Insurance Is More Expensive
It’s crucial to understand that disability insurance is significantly pricier than term life insurance. In fact, its costs rival the more expensive whole life insurance policies, without the (debatable) advantage of cash value accumulation. It’s no wonder that this critical type of insurance is often overlooked. The main reason? The likelihood of needing disability insurance is substantially higher. With life insurance, many people underestimate their lifespan, leading them to purchase coverage they never use, or they opt for costly whole or universal life policies, then drop them at the first sign of financial hardship. However, the risk of a disability is universal, affecting people of all ages, which means it’s more probable you’ll need it.
If you’re part of a dual-income household, disability insurance may be a more critical investment than life insurance, considering the high costs associated with caring for a disabled individual.
How Standard Disability Insurance Works
Standard disability insurance operates in a fairly straightforward manner. If you’re unable to work and are deemed disabled according to the policy’s definition, the insurer replaces a designated percentage of the income you would have earned had you not become disabled. Similar to policies for health, auto, and life insurance, disability policies include specific provisions, exclusions, and stipulations, and they need careful review. Generally speaking, the lower the premium, the more exclusions and stipulations the policy contains. Analyze these policies carefully, and never commit to anything you don’t fully understand.
What to Look for in a Disability Insurance Policy
Here’s a guide to what you should look for when picking the ideal disability insurance plan:
- Guaranteed and Noncancelable: A good policy will have a fixed premium and remain in effect as long as payment is kept current, regardless of any subsequent health issues or unforeseen circumstances.
- Own-Occupation Coverage: Ensure the policy protects you if you cannot perform the duties of your specific occupation. Otherwise, the insurer might not pay out unless you’re unable to work in any capacity.
- Inflation-Adjusted Payments: Opt for a policy rider to allow payment increases to stay aligned with both inflation and your income. If you purchased your policy when earning $25,000 and now earn $85,000 when a disability occurs, it’s critical that your coverage keeps up with your increased income.
- Coverage Until Retirement: The best disability policies are open-ended, providing benefits for as long as you’re disabled, extending up to your retirement age. Even if you’re not in a position to start another financial commitment immediately, it’s always wise to investigate. Do yourself a favor and determine what the cost would be. Also, it can be useful to ask friends or relatives for an agent referral or a disability insurance carrier. Check with your existing insurance provider. There’s no cost to do the research.
