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Disability Insurance

February 11th, 2018 at 10:14 pm

I've been taking the insurance course for my CFP recently and thinking a lot about insurance.

One area of potential risk to many that is often underinsured is disability. Personally, I am aware of this because back in 2000, I spent 7 weeks in the hospital and another several months recuperating, having a second minor related surgery, and recuperating from that.

But I, like most people, assumed that the disability insurance I had through work would be sufficient. Back then, I was ok, since the period when I was out of work covered the summer, when, as a teacher (my former career), I would not be working, and just one semester, when I was sufficiently recovered to be enrolled in a program for temporary substitute teachers. It was just a very short time of not working, which I was covered for by my assets at the time.

The typical employer-provided long-term disability policy insures up to 60% of your income. Since this insurance is provided at no cost to you by your employer, it is taxable income when received. Would you be able to survive on 60% of your base salary? I know that I would find it a challenge!

When I first changed careers and started to learn more about this issue, I worked for an employer that did not provide any disability insurance, so I joined an industry association and bought a plan through them.

My current employer does provide long-term disability, so I've canceled the group policy, but I found that another industry group I belong to provides the opportunity to purchase true individual insurance for either $1,000 or $2,000 a month above what my employer benefits would provide. I'll be completing that application this week, If I chose the $1,000 additional income per month, that would be nontaxable (because I'm paying the premiums myself, any income that results is free from tax, unlike employer provided insurance) and would give me over 80% of my current income. Since there are bound to be more expenses when one is disabled, this feels more reasonable to me "just in case."

I have three friends who have been going through breast cancer treatment this year, another one who is off on disability for a rare disorder. Until I am at the point where I feel financially independent, this insurance is important. After financial independence, it's a luxury, but beforehand, it's a must. After all, one's ability to earn income is the biggest asset that most of us have--especially the young!

I found an online calculator at that allows you to calculate your personal probability of being out on disability before retirement. Mine is 13% for being out for 3 months or longer, with a 46% chance that if I were disabled that it would last 5 years or longer, and an average length of long-term disability of 85 months--over 7 years, which would get me very close to retirement age.

Insurance is meant for low-probability, high-cost situations. Disability is definitely an area where many people are underinsured--and by the time they start to think they might need it, they no longer qualify!

So--what's your PDQ and do you have disability insurance through your employer or anything purchased on your own?

6 Responses to “Disability Insurance”

  1. FrugalTexan75 Says:

    I have disability through my employer, but have been thinking about looking into something to cover my husband. He's much more likely to have something causing him to be off work for an extended time.

  2. Dido Says:

    Laura, if he doesn't have any thru his employer, try industry associations. Now that means paying dues to the association yearly but may be the only way to get a policy. When I applied for a policy on my own, I was denied because of my past health history, but this association policy has looser requirements, so I do qualify.

  3. FrugalTexan75 Says:

    I'll have to look to see if there's a pizza delivery driver association ..

  4. Dido Says:

    Ah, good luck with that! Some college alumni associations offer it too.

  5. PatientSaver Says:

    I agree, disability insurance can be very important, but $1,000 a month seems like an awful lot of money for something that may never happen. The cost is so high that I think at this point I would rather just bank the money in investments/savings and plan to self-insure. Of course, I'm transitioning soon to p/t work so the risk of losing my earning power is much less.

    Still, for most folks, this is an important topic.

  6. Dido Says:

    PS, the *benefit* would be an extra thousand a month on top of the 60% of salary I get from my company; the COST for that insurance would be $485 for the year with a 90-day elimination period or $435 for the year with a 180-day elimination period. That's $40 or $36 a month!

    Yes, a thousand a month would be outrageously expensive! Even the most expensive long-term care policies don't cost that much.

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