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Disability Insurance: Do You Need It?

Mar 16, 2017 5 min read Kevin Johnston

Key Takeaways

  • Using your nest egg for current costs could crack your finances.
  • Take home a policy that covers your take-home pay.
  • A "COLA" feature could add fizz to your longer-term finances.


You have a good job, and it looks like you will be able to live well and have a relaxing retirement. Then you get diagnosed with a condition that will prevent you from working for a year or more. You won't be able to go to work or earn an income, and the bills will keep piling up.

Social Security Disability Insurance will pay you on average about $1,200 per month, but it will depend on your prior year's earnings record. It can be difficult to qualify for this coverage, and administrators can take their time making a determination in your case.

Using your retirement savings

If you pay for your living expenses with your retirement savings, you may qualify for an exception to the 10% early withdrawal tax penalty. However, you may use up a huge chunk of your retirement money, which you are going to need someday. You may even use up all of it.

What will you do? You will be able to return to work eventually, but in the meantime, you could lose much of what you have worked for.

You may need disability insurance.


How much disability insurance pays

You can buy a policy that offers as much coverage as you like. You should consider buying a policy that will pay the amount you currently take home after taxes. For most people, this is around 60% of current wages.


The types of disability insurance

You can buy two types of disability insurance:

  • Short-term disability insurance - This kind of policy will begin paying within two weeks of your disability, and lasts up to two years.
  • Long-term disability insurance - You have a waiting period of weeks or months, and it will pay for several years or for the rest of your life, depending on the option you choose.


Additional features to consider

Your policy may have a "coordination of benefits" feature. This means the insurance company will look at all the benefits you receive from all sources and only pay the difference between those benefits and what you scheduled your disability insurance to pay.

You can pay extra to get a cost of living adjustment feature that will pay more as the years pass and your living costs grow.

You can ask for a partial disability feature that allows you to return to work part time and receive part of your benefits.

You may ask (and pay for) a waiver of premium clause that allows you to stop paying premiums 90 days after you are disabled.

In addition, you might consider a "return of premium" feature that returns part of the premium to you if you have made no claims within a specified time.


Where to buy disability insurance

The most common way to buy disability insurance is through your employer. Occasionally, people buy this type of insurance through an insurance broker.


What you can do next

If a sudden illness keeps you from working, disability insurance means you don't have to stop being paid. You have a wide range of short- and long-terms options that can account for inflation—and even give you unspent money back. But don't wait until your need is urgent. The time to plan is when everything is going well, not when a crisis hits.



Kevin Johnston is a financial writer who writes about personal finance and investments, as well as financial management and planning. He has written for The New York Daily News, The New York Post, The San Francisco Chronicle and The Houston Chronicle.


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