Why Should You Buy Disability Insurance?

Why you should consider disability insurance

A few years ago I realized the importance of having good disability insurance. If something were to happen to me, if I became disabled, and was unable to work, my family would face a significant financial hardship. According to David Bach, in his book Smart Couples Finish Rich, 60% of Americans lack any form of disability insurance.

The reality is that my wife would have to go back to work and provide for me and our two children. But beyond trying to replace my current income, she might be responsible for additional healthcare costs and potentially place our children in a daycare when they aren’t in school (even more expenses).

Rather than put our family in such a position of financial risk, I felt it necessary to open up a disability insurance policy to help protect against this unthinkable situation. My employer does offer some coverage, but an additional policy (called gap coverage) brought us up to the level of covering most of my income each month.

Why you should consider disability insurance

How Does Disability Coverage Work?

According to experts you can get about 50% to 75% of your pay in disability coverage which is roughly about what it would take to replace your income after taxes. This is typically fine since your disability payments aren’t taxed. Here are a few more things to keep in mind:

  • You can’t qualify for disability insurance if you don’t have earned income.
  • There are income caps. Insurance companies don’t want to insure an enormous amount of income.
  • The price for the insurance is based on what you do for a living. For example, someone who operates heavy mechanical equipment may pay more for coverage than someone who sits behind a desk all day.

Shop Around for Disability Insurance

There are obviously many options out there for purchasing disability insurance. It’s important to shop around! Personally, I think it’s a good idea to get at least three quotes before making a final decision. Here are some tips to keep in mind when shopping:

  • Dave Ramsey says you’re better off to buy your disability insurance through your employer if you can do so. Some employers offer disability as a part of your benefits, but this is usually not enough. You will most likely need to purchase more to replace your income. But, if you do purchase with your employer, make sure you can take it with you when you leave.
  • When does it pay? Does it pay you when you can’t do your work for your current employer, or if you can’t work all together?
  • You want to check the elimination period. This is the time between the doctor declaring you as disabled and when you would start receiving payments from your insurance company. The longer this period, the cheaper your insurance will be.
  • Determine how long the policy will cover you.
  • What types of disabilities does the insurance cover such as physical, mental, etc.?

I personally don’t like to think about such situations and hope we never have to use my disability coverage, but having the proper insurance (including term life insurance) is about eliminating financial risk. Getting disability insurance is just as important as building an emergency savings.

Note: I used a couple of helpful resources when learning more about disability insurance: Dave Ramsey’s iPhone app and David Bach’s Smart Couples Finish Rich.

Do you have disability insurance? Why or why not? What do you think about disability insurance? Leave a comment!

Ready to Quit Living Paycheck-to-Paycheck?

Just click to join 163,000+ others and take our FREE email course to better manage your money, pay off debt, and save!

  1. Jerry

    This is timely for me- I have been in the workforce since 1968- I have now been on private disability for 11 months. If I had not secured disability insurance through my previous employer, I would be financially devastated. We are doing OK, with some austere measures in place. Prior to my last job that provided this insurance for a small premium, I never considered purchasing it. I thank God for steering me in the right direction. I get down because I have a need to work, and I feel that my time is no longer valuable- but I know God has something better planned for me.

  2. Thomas

    Disability insurance covers your ability to perform an occupational class, not your particular job. You’ll want to describe your job to the insurance agent and then ask what ‘occupation’ would be used to determine your coverage. If your specific job is more physically demanding than most in your occupation, you may be denied coverage. For instance, if you are a teacher but your job in special education also involves lifting 50 pound children and you can’t do that any more, the insurance company may not recognize how heavy your job is and will deny your benefits.

  3. Bill

    Great advice!
    I was diagnosed with ALS at the age of 36 and I’m so thankful that I had disability insurance. It’s been my only income for over 16 years. If for no other reason than having peace of mind, get disability insurance ASAP.

  4. sarahbeth

    I love this article!!! My husband and I just went through Dave Ramsey’s Financial Peace University, and I loved the session on insurance because we really don’t know too much about it. We do not have disability insurance at the moment, but it is something we would like to get very soon. We are both in college and have very low paying jobs, but I’m praying we can start getting more insurance soon.
    I like how you brought up the elimination period. One strategy we are considering is building a beefy emergency fund, so if an accident ever did happen, we could afford to have a longer elimination period (thus a slightly cheaper rate) because we have the emergency fund to fall back on.
    Jason, thank you for the reminder of the importance of disability insurance!!

  5. Ravi kumar

    Disability insurance is an important form of coverage that offers the needed financial protection, if ever you come across any mishap that may bring in disability. Look for the available options and then, buy the best plan.

  6. Kelly Moser

    It makes me so happy to see articles like this on financial blogs! Disability Insurance is so underrated in the eyes of most consumers. It’s common to think, “I have a desk job, how could I get disabled?” BUT, what most people don’t realize is that 90 percent of disabilities are caused by illnesses, NOT by accidents.

    When you set out to get private DI, make sure to educate yourself first on a few policy terms so you understand what you’re actually buying. A great resource is this glossary on DI terms: http://www.diservices.com/salestools/disability-insurance-glossary.html

    Also, be sure to request several quotes from your agent so you have options (and aren’t just looking at the most expensive or decked-out policy). Thanks again for sharing your advice!

  7. Another consideration is whether the insurance is purchased with pre-tax dollars or post-tax dollars. This is important because if you purchase your insurance with pre-tax dollars then the benefits received are taxable. If you use post-tax dollars though then if you are disabled, you will not have to pay taxes on the money received from your insurance. This is one of the few times where post-tax is actually better than pre-tax.