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Ask Dave

Why Do I Need Disability Insurance?

Jenna on Facebook asks what disability insurance is and why a young, healthy married couple would need it.

QUESTION: Jenna on Facebook asks what disability insurance is and why a young, healthy married couple would need it. Dave explains.

ANSWER: Disability insurance pays you an income in the event that you become disabled. If you are 30 years old, you are 12 times more likely to become disabled than to die by age 65, and yet you would never consider walking around without life insurance. If your husband is hit in a car wreck by an uninsured drunk driver and loses his ability to work due to injuries and there’s no one to pay him—no one to sue, then you’re stuck because he can’t work. You’re obviously working, but you lose his income.

If you work outside the home and the same thing happened to you, your family would lose your income. You’ve got to make sure your income is replaced in the event of disability. You can get between 50% and 75% of your pay in disability coverage, and you only want long-term disability. Short-term is not needed. Short-term is your emergency fund, and you’re out of debt and you have control. That’s not the problem. The problem is when he’s a paraplegic and in a wheelchair from age 26 to 65. That creates a financial hardship that’s unbelievable.

You can’t get much more insurance than 50% to 75% of your income. That’s about what your take-home pay after taxes is anyway. It’s not too far off of replacing your income. If you do not have an earned income, then you wouldn’t qualify for disability insurance. There are also income caps, because they don’t want to insure a huge income. Disability insurance is also based as much on what you do for a living as how healthy you are. If you’re in a blue collar situation where you use your hands every day, you’re at much higher risk than if you fly a desk, so you’ll have a much higher rate.

You’re much better off to buy your disability insurance through your work or some kind of association if you can get it that way. You also need to check if it has some kind of own-occupation clause. That means if you can’t do your occupation, by definition, you are disabled. You also need to know the elimination period. The elimination period is the time between your doctor declaring you disabled and you starting to receive payments. The longer the elimination period—it’s like a deductible—the smaller the premium. For instance, a 180-day policy will be much cheaper than a 90-day policy.

Some of the saddest financial situations I’ve seen are disabilities—not death.