Is Disability Insurance Worth It?

UPDATED: May 13, 2022

Economic conditions are not the only thing that can threaten the financial well-being of a worker. A serious illness, injury, or psychiatric issue can all threaten people’s ability to work. For this type of income loss, disability insurance can be invaluable. Let’s take a look at at whether or not disability insurance is worth it.

Types of Disability Insurance

Short-Term Disability

People who have an illness or injury that takes them out of work for a short period of time can benefit from short-term disability benefits. Let’s say that your doctor has recommended surgery. You’re going to have to take time off of work to recover from the procedure. Short-term disability insurance can help replace the income lost while recovering.

Here’s the catch, the injury or illness cannot be something that occurred on the job. For work related cases, you’ll need to replace your income through worker’s compensation, which almost every employer is required to carry.

Short-term disability is typically limited in three ways:

It only covers the condition for a short period of time. Coverage time limits vary from about a month to a year, depending on the plan chosen.
The policies generally don’t cover more than 70% of previous earnings, and it often covers less.
There’s a waiting period between the onset of your disability and the time coverage begins.

Short-term disability isn’t enough to protect you should a medical condition or injury keep you from working for longer periods. It also means you’ll need to have savings to cover the time period before benefits begin.

Long-Term Disability

When your short-term disability benefits run out, you can make a claim on long-term disability insurance. One of the key features of long-term disability is that it excludes coverage for short-term conditions.

As an insurance product intended to replace a portion of income for an extended period, long-term disability (LTD) does have an exclusion period. Typically, this is the first three to six months of your disability, though it can sometimes be longer. Before your exclusion period runs out, you’ll want to draw on short-term disability benefits, personal savings, investments or or all to pay the bills.

Long-term disability also has an amount of time past which you can no longer get paid, even if the disability persists. Often this period is five years, though a really good policy often provides benefits until retirement age.

This is a benefit paid for by tax dollars and administered by the Federal Government. Although this is a well-known program, it’s very hard to qualify (PDF). Generally speaking, you have to be severely impaired to collect. The process to claim Social Security Disability (SSD) takes a long time, and many people get denied.

Social Security Disability is a fixed sum of money that successful applicants can claim until retirement age. Like other disability programs, benefits will end if a worker regains the ability to work.

SSD is a form of long-term disability, because it only works if your disability is expected to last a year or longer. It’s fairly restrictive: you generally can’t hold down any kind of job to qualify. As a result, people often need to get a lawyer in order to claim SSD.

Do you Need Disability Insurance?

The benefits of disability insurance is a safety net if you are unable to work. Experts recommend that you should carry some form of disability insurance if you have debt or are the primary income earner in your household. So the question of if disability insurance is worth it is heavily influenced by your personal situation.

Do You Have Debt?

Not being able to pay even smaller loans can ruin your credit and cause financial hardship. Evictions, vehicle repossessions, and student loan default are all toxic stressors even for people who are healthy. Imagine what it would do to someone trying to recover from an illness or injury.

Do Other People Depend On You?

It’s one thing to take financial risks if you are only responsible for yourself, and quite another to do so if someone else is depending on you. For instance, a single parent is likely the only earner in the household. While there might be other payments like child support or alimony, chances are that a single-parent home has only one person earning income. This means that there’s little safety net in case the parent becomes disabled. Is disability insurance worth it for someone in this situation? Likely.

Do You Have Savings?

Those that have significant liquid assets might consider self-insuring. In this case, the disabled person would pay for living expenses out of savings, rather than purchasing a disability policy from an insurance company.

So Really, is Disability Insurance Worth It?

Most workers will want to have some disability insurance. There are not many workers out there who have no debt, no dependents, and a lot of cash in the bank. Even for workers who are debt and dependent-free, disability can cause a lot of financial stress.

For the best outcomes, make sure that your short and long term disability policies cover the full length of your illness. Plan to pay living costs out of pocket for the short term before disability benefits kick in.