Do I Need Disability Insurance?

Disability insurance is intended to replace a portion of your salary if you are disabled and can’t work. This kind of insurance is even more crucial if you own your own business or are otherwise self employed. If you’re a W-2 employee, your employer may provide coverage for a nominal fee.

Disability insurance is available (although it is difficult to be approved for) through the federal government, in the form of Social Security Disability Insurance (SSDI for short). It also doesn’t replace a lot of income, likely in the neighborhood of $1,000 to $1,500 per month. Luckily, you can also purchase a policy from a private insurer. As is the case with all types of insurance, the larger the benefit you’re hoping to receive, the more money you will pay for a policy.

Disability insurance will ideally cover 60-70% of your working income. If you pay for the coverage out of pocket and don’t claim it on your taxes as a deduction, the payments you receive should become disabled won’t be taxed, either. This is how you’ll be able to get by on 60-70% of your previous income, by saving on those income taxes.

If you’re a small business owner, it may be more difficult to get a policy, because you’ll have to prove your income and your insurance costs will be based on what type of business you run. If it’s one that puts you at more physical risk, you can expect to pay more than someone who works a desk job, for example.

There are both short-term and long-term disability policies available. A short-term policy will generally benefit you for a few months, while long-term disability is for the long haul. If you have a solid emergency fund (consisting of three to six months’ worth of expenses), you’ll only need a long-term disability plan, but if you lack savings, you should have both short and long-term coverage. Another consideration is how long your disability insurance will cover you – if you’re hoping to be covered until retirement, it will cost more.

It isn’t ideal to fit yet another bill into your budget, but if you can’t swing the cost of disability insurance, what are you going to do if you become disabled and can no longer work? Luckily, this is yet another topic you can discuss with your CERTIFIED FINANCIAL PLANNER™ for advice and recommendations of insurers to work with.