Here's one of the greatest financial mistakes people make: they don't have disability insurance (or enough of it.)
And, unfortunately, many people make this mistake.
Why is it a mistake? Consider the following:
1. Your ability to earn an income is your single biggest financial asset. If it goes, you're probably in deep do-do financially.
2. The chances of becoming disabled are far greater than other potential disasters people pay to protect themselves from -- such as death. Yes, it's much more likely that you'll become disabled than die and that's why you need disability insurance as much as you need life insurance. (Note: I'm NOT saying you need disability insurance and not life insurance -- I think you need both.)
This issue was brought to my attention again recently when Country Financial emailed me their latest survey, this one dealing with disability insurance. Here's what they found:
With disabilities among American workers rapidly growing and government reports that 3 in 10 workers will suffer some type of disability before retirement, a new shows that only 17 percent indicate they have enough disability insurance to replace most (14 percent) or all (3 percent) of their income. Further, 35 percent say none of their income would be replaced if they were to become disabled and unable to work.
In fact, for many Americans disability insurance falls low on the priority list. Sixty-two percent of Americans value other forms of insurance protection, such as homeowners (43 percent) and auto insurance (19 percent), over disability insurance. Just 22 percent value disability insurance most.
Other survey highlights include:
- In the short-term, one-third (33 percent) say they could not maintain their lifestyle if disabled and out-of-work for 90 days, and another 18 percent are unsure.
- If they were disabled, one quarter (26 percent) say they either do not know where their income would come from or their income would come from no where.
- Nearly one-in-three (31 percent) expect their disability income to come from the government, despite Social Security Administration reports that less than half of all disability claims are approved.
Basically, a very large number of people are playing Russian roulette with their finances -- taking the chance that they won't ever be disabled and need to replace their income. Or, almost as bad, many are counting on the government to help them out if they become disabled. Let me say this about the government's help in this area: the chances of them providing a good amount of your income through disability coverage is about the same as them replacing a good amount of your pre-retirement income through Social Security (which is not good at all.)
For more on this topic, see Why You Need Disability Insurance and How to Save on It.
Is that 3 in 10 for all workers? I'd be interested to see what the disability rates are for only white-collar jobs. More than likely it is nowhere close to 30%. Still a great idea to have this type of insurance though.
Posted by: Kevin | October 02, 2007 at 09:05 AM
I really don't see disability insurance as necessary for myself with 1000+ hours of sick leave saved up, and with a white collar job that allows telecommuting if necessary, I don't see an issue.
Posted by: Susan | October 02, 2007 at 09:25 AM
Hmm, ever play football to not get hurt.. what happens? You get hurt then!
I know it's a good insurance but I would have to be in a life threating situation to keep me from working. I wonder how many of the 3 of 10 workers really can't work? When you think of all the people you know, how many of them really CAN'T work? I would guess it's closer to 1 in 10,000. However, I guess it would be worse for labor jobs.
Posted by: Beastlike | October 02, 2007 at 09:35 AM
I read every post you make about disability insurance, but you never suggest where to buy it??
Posted by: Kaleb | October 02, 2007 at 10:33 AM
Kaleb --
Hmmmm. Maybe that needs to be a post, huh?
Posted by: FMF | October 02, 2007 at 10:56 AM
I'm talking about this now with my financial advisor. I have some, but not enough disability (short and long term) through my employer.
However, as the sole bread winner for the house, I have other priorities to take care of should I be injured and not able to work for a while. I'm an hourly consultant and only get paid if I'm working.
Thanks for the reminder to follow up with them!
Posted by: Curtis | October 02, 2007 at 02:01 PM
My previous employer had a ridiculously low insurance policy in this regard (like 10% income replacement) so I actually did go out and obtain it.
Here's the thing:
1) many of you have this as part of your employment package. Now, it's not portable if you are relying on your employer to pay the premium, but if your coverage is very good under it, the added expense might not be worth it. (I debate often whether to keep my policy now that I am with a company that has good coverage.)
2) it's not a replacement for an emergency fund. To make it affordable you are going to need a pretty lengthy waiting period before the insurance kicks in (90-180 days). So don't think it replaces your other strategies.
3) it's still not cheap. You are going to spend several thousand dollars if you want one that is inflation protected and that replaces a sizeable part of your income. It's definitely a hell of a lot cheaper than long term care and some other types of policies, though.
Posted by: JACK | October 02, 2007 at 03:19 PM
I was laid off with a 9 month severance package in early 2004. I has both short and long term disability through my employer which would have replaced 60% of my income in the event of a disability. I was diabled one month after I was laid off only to discover that my disability insurance was terminated when I went on severance and that it was not and could not be extended.
Tough lesson! Still waiting for SS disability to be approved.
Posted by: Adelle | October 03, 2007 at 06:41 AM
As Adelle mentioned, some employers offer both short AND long term disability insurance - one large employer in my neck of the woods covers the long term for employees, but they have to pay for the short term. Most don't pay for it, but the problem with that mindset is that 3 months is a dang long time to go without income waiting for the long term benefits to kick in! They could end up selling plasma (or worse) to try to get through the 90 days, unless they have that emergency fund.
Jerry
Posted by: Jerry | October 25, 2007 at 11:17 PM
What if you became unable to type? What if you had a permanent disability that meant that you couldn't work for long stretches of time?
There are lots of reasons why most people should have long term disability insurance. Short-term, its possible to self insure through sick leave and saving. As with all insurance, its necessity is a combination of how likely it is and what the effects would be. Losing your ability to do any job is relatively uncommon, but its effects on me (and I'm guessing lots of people) would be pretty catastrophic.
Posted by: plonkee | October 26, 2007 at 07:56 AM