Jennifer Fitzgerald, PolicyGenius contributor
Until a few years ago, I had no idea there was such a thing as long-term disability insurance. Even when I started a job at a company that offered rather generous long-term disability coverage, I knew very little about it. Like most people, I didn't retain much from my benefits orientation day one on the job. (Rookie mistake: pay attention to that stuff!)
But now, after working in insurance for several years and launching PolicyGenius, I'm a vocal advocate for disability insurance. And I bought myself disability insurance. Here's why:
The risk and impact of disability is greater than you think
Our brains are wired to make us terrible judges of risk, so best to trust the facts. The fact is that our risk of disability is twice as high as our risk of early death. According to the Social Security Administration, 1 in 4 of today's 20-year olds will become disabled for a period of time before reaching age 67. Also, disability isn't necessarily permanent or catastrophic. It's simply a health condition that renders you unable to work for an extended period of time (typically 3 months or longer).
I bet you can think of someone you know who has experienced a long-term disability. In my case, it was my younger brother. At age 27, he was young, healthy and fit. Out of nowhere, he started experiencing severe back and leg pain. Turns out he had degenerative disc disease and a synovial cyst on his sciatic nerve. This condition left him unable to work for 6 months. At the time, he was in the Army, which provides full coverage (of health care and income) during periods of disability. However, had he been working for a private sector employer, he would have been in a tough spot. Most employers don't provide long-term disability insurance. That means he would have been without a paycheck for those months he was in treatment and recovery. That's the situation a lot of people unfortunately find themselves in. A 2007 Harvard study found that medical problems contributed to over 60% of personal bankruptcies. Lost income due to illness was the primary cause for about 40% of these bankruptcies. That finding makes sense when you consider that the average long-term disability claim lasts nearly 3 years. Most people don't have enough in savings to cover 3 years without an income.
Long-term disability insurance is like "instant savings" for a worst case scenario
That's where long-term disability insurance can help. It provides an income if you're unable to work and earn a paycheck due to illness or injury. Typically, it will pay a cash benefit equivalent to about 60 percent of your gross income. If you buy your own policy with after-tax dollars, that benefit is tax-free.
You're probably thinking: sounds great, so what's the catch? The "catch" is often the price, which seems high to people unfamiliar with the product. To insure about 60% of your gross income, expect to pay around 2-3% of your gross income in annual premium. For example, a 30-year old man earning a $60,000 salary would pay about $100 per month for a long-term disability policy that would pay him $3,000 per month tax-free during a disability. That might seem like a lot of money, but it's not when compared to other expenses. For example the average monthly phone bill for a person making $60,000 per year is $120 per month. Ok, so you wouldn't trade in your cell phone for disability insurance, but what about stuff you wouldn't even miss?
Getting tactical: finding the money to buy disability insurance now I bet if you did a real scrub of your monthly expenses you could find the money to pay for a policy that would protect you when you most need it. Here's what I found when I did a thorough scrub of my expenses:
- $25 per month on subscriptions for digital magazines I rarely read
- $40 per month for an international data plan on my cell phone that I forgot to de-activate after my last international trip 12 months ago
- $20 per month on various fees for memberships I don't use
That's $85 per month I just freed up with a little bit of expense diligence, not even any belt tightening (like dining out less often). That $85 per month would pay for a long-term disability policy that would provide a monthly $1,500 benefit. You might need a policy with a higher benefit, but I just wanted to illustrate that the cost of disability insurance doesn't have to be an obstacle. It's certainly worth a few minutes of your time to look into your disability insurance options and be prepared.
Take the time to educate yourself about disability insurance and make it a part of your next financial housekeeping.