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 health care costs and potentially place our children in a daycare when they aren’t in school (yet 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.
How Does Disability Coverage Work?
According to Dave Ramsey you can get 50% and 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.
Shopping 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 3 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, in my opinion.
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.