What is Disability Income Insurance and why would I need it?
What is disability income insurance? Why would you need disability income insurance?
What is it? The full name of Disability income insurance kind of gives it away. It protects your income in the event that you become too sick or injured to work. This insurance policy will pay you a monthly check to replace your income if you are not able to work. Pretty cool, right?
Most young workers don't think they will get sick or injured enough to miss a significant amount of work time but the chances of it happening are higher than you might think. I will provide some more information about disability income insurance later, but first, let me tell you a short story about the importance of disability insurance.
Years back, as a fairly new advisor I had a young client. This client was married with a couple of young kids. Great savers for their age and had built up a pretty decent retirement fund.
My role at the time was very transaction-focused and not comprehensive planning. I was helping them with their saving/investment strategy and one day asked about life insurance. After reviewing the situation we determined she was significantly underinsured
I helped her get a term policy and they felt very good about having that covered. Only a few months later I got a call from her letting me know that when she was in the hospital recently for a normal procedure, her heart stopped.
Thankfully they were able to bring her back but her chest needed to recover for a significant period of time and she could not work. They ended up needing to drain a significant amount of retirement savings to cover hospital bills and living expenses while she was out of work.
That was the day I realized how important disability insurance was. Please review your disability insurance coverage if you have not recently. They had a policy that would have paid out if she would have died, but not one if she lived but could not work.
In addition, I found how much more valuable it is to work with a financial advisor that reviews your whole financial situation, not just a piece of it. It was not long after that I decided to start my CFP® coursework.
The numbers behind the why make sense too. You insure your car and your house and those cost tens of thousands and hundreds of thousands to replace. If your home burned down and you did not get a check to pay to rebuild it, you would be financially ruined. But depending on your job, you will likely make millions of dollars during your working lifetime. And if you are no longer able to work, you are leaving that money on the table and not able to support your family.
Thankfully, most jobs offer disability insurance as a benefit. Not all companies do. And even the ones that offer it, not all employees enroll in it. Beyond that, if you do enroll in a plan, it may not actually be enough to cover your expenses if you are not able to work. You need to review that policy.
If you do not have a policy at work or you don't have enough coverage, you will want to seek out an individual disability insurance policy. You will have more ways to set up a policy like this and the cost will vary depending on the kind of policy you get and how long you want the benefits to last. There are a couple of main categories of disability income insurance,
Any-Occupation: This type of policy will be less expensive because it is harder to qualify. In order for this to pay out, you need to be sick/injured enough that you cannot perform any type of job. Not just the specific job that you have skills in and may require certain body functions to perform. If you are able to work at all, it won't pay. Depending on your job and your budget, this type of policy may make sense for you.
Own-Occupation: This one is very favorable to the policyholder, but also the most expensive. If you are not able to perform your specific job due to your injury, it will pay out. If you are able to afford it, this may make sense for you.
A surgeon is the easiest example to give, but not the only example. If they lose a few fingers, that may keep them from being able to perform surgery again. So they may be able to qualify for an Own-Occupation policy depending on the severity of the injury. But, the insurance probably would not pay out if the surgeon only had an Any-Occupation policy because they still have a lot of other jobs they could perform, including teaching at a medical school.
There is a third option called a Modified Own-Occupation. This type of policy starts as an Own-Occupation policy, but then after a certain amount of time on the claim, I change to Any-Occupation. Meaning it will stop paying you money if you have recovered enough to start working other jobs, even if you are not able to go back to your original occupation. The cost of these policies generally falls in the middle of the Own-Occupation and Any-Occupation so it could be a good option depending on your budget.
This could be a valuable piece of your financial plan, and some people are underinsured in this area. You owe it to your family to have a plan in case you are not able to work, and sometimes that plan includes insurance. Please reach out to a professional if think you this is something you need to address.
Phil Francois CFP®
Foundation Wealth Planning
https://www.foundationwealthplanning.com/
At Foundation Wealth Planning, we are a financial planning & investment management firm primarily helps Catholics align their finances with their values. This article is for educational purposes only and not specific advice for you. Please reach out for advice on your specific situation.