Insurance is one of the few products that we buy hoping we’ll never have to use. Yet while we all hate paying monthly premiums for policies, when it’s time to file a claim and collect benefits, we’re grateful that we did.
But unlike auto insurance and health insurance, which we all know we need, there’s another type of insurance policy that’s just as important:
Not sure if this type of policy is right for you?
Here’s why you need disability insurance and how it can help you plan for unexpected circumstances in the future.
You Can Earn Income Even If You Can’t Work
Disability insurance is not health insurance — it’s income insurance. If an illness, injury, or disability prevents you from being able to work, you can still earn income every month. Most insurance companies allow you to select coverage up to 60% of your current salary.
If you are the primary income earner in your household, having this source of income can be invaluable.
Because you can use your benefits to pay for anything, including your mortgage, utilities, groceries, and credit card bills.
Pay Attention to the Definition of Disability
When choosing a disability insurance policy, pay special attention to the definition of disability. Most insurers offer the “any occupation” definition of disability, but select insurers offer the “own occupation” definition. Own occupation is far better and makes it much more likely that you’ll be eligible to collect benefits.
With the any-occupation definition you must be disabled in a severe way that prevents you from working in any type of job. It is difficult to meet that standard. With an own occupation policy you can collect benefits as long as you have any illness or injury that prevents you from doing your current job.
To learn more about the different definitions of disability, see this review of Principal Disability Insurance from Physician’s Thrive.
Protect Your Current Assets
For some people, a loss of income forces them to dip into savings accounts, drain retirement accounts, sell off stock investments, and even sell their home. With disability benefits to replace lost income, you can protect all of your current assets and continue to plan for the future.
Rather than selling off assets you have or racking up credit card debt, disability income insurance ensures that you can continue to pay your bills and invest your money wisely, even if you cannot work.
Grow Your Retirement Savings
Disability insurance benefits won’t just prevent you from having to borrow from retirement accounts. Because benefits can be spent in any way you wish, you can also use a portion of your benefits to continue to fund your retirement accounts.
Many people that suffer a job loss as a result of an illness or injury focus more on their current financial situation and less on what their future financial situation may be. But disability insurance doesn’t pay benefits forever — benefits end at retirement age.
Put some of your benefits aside in a retirement account, such as an IRA. You’ll lose out on any employer match contributions that your employer might have paid into your 401k, but your own contributions, even small ones, can make a big difference when your disability benefits come to an end.
Provide Security for Your Family
Everyone can benefit from having disability insurance, including single individuals that don’t have any dependents. But if you have children that you’re still financially responsible for, disability insurance is even more important.
You can use your benefits to continue to pay for school tuition, summer camps, after school activities, and everyday living expenses. You can also use them to pay for your children’s private health insurance if you’re a single parent or if your spouse or co-parent doesn’t get health insurance through their employer.
You Can’t Rely on Social Security Disability Benefits
The Social Security Administration offers SSDI benefits for people with qualifying medical conditions, but they are hard to qualify for and don’t pay out nearly as much as you might think.
For 2023, the maximum you can receive in SSDI benefits is $3,627 per month. That may sound like a lot, but only a small percentage of SSDI recipients receive that amount. The average monthly SSDI benefit is only $1,483 per month, which is just over $340 per week.
An individual disability insurance policy from a private insurance company offers far greater protection and much more coverage.
Disability Insurance Policies Offer Extra Benefits Too
When choosing a disability insurance policy you’ll have the option to add riders, which are extra benefits. Adding riders to your policy will add to the cost of monthly premiums, but the extra payouts can be huge.
For younger professionals that are still paying off student loan debt, the Student Loan Repayment Rider will cover the cost of your student loans. With this rider, you’ll receive your monthly benefits plus the amount you owe in student loans each month.
Another rider that offers added monetary benefits is the Survivor Benefit. With this rider, your dependents or heirs can continue to receive a few months of your disability benefits if you die while you’re still collecting benefits.
Though we all hope we’ll never have to use it, the safety net of disability insurance provides peace of mind and financial protection.
Without it, your finances could be in jeopardy. With it, you can rest assured knowing that even if a medical condition prevents you from working, you’ll still have a steady stream of income.