Certain types of insurance are more common than others. Car insurance is required in every state except New Hampshire. If you have a mortgage on your home, your lender requires you to carry homeowners insurance. If you rent an apartment, your landlord may require renters insurance. Most Americans are required to maintain a minimum amount of health insurance (but since 2019 there is no longer a penalty for failing to do so). Just over half of the population has some form of life insurance coverage.
Disability insurance is far less common than other types of insurance. Only 18% of the population carries some form of disability insurance. Not everyone needs disability insurance, but chances are a far greater percentage of the population should be carrying it. Here’s why so few Americans carry disability insurance, when you should consider it, and how it can protect you from disability.
Why don’t most people have disability insurance?
Less than one in five Americans have disability insurance, and after you strip away those that only have coverage through their workplace, the number of workers that have sought out disability insurance for themselves is likely much smaller. While few Americans carry disability insurance, the occurrence of a disability while working is far more common than you think. 6% of working Americans experience a short-term disability every single year. 25% of Americans will miss more than one year of work due to a disability over the course of their working life.
As you can probably guess, many Americans aren’t prepared to be involuntarily unable to work. Only 40% of households have enough savings to cover three months of living expenses, and only 28% can cover six months. Social Security Disability Insurance, or SSDI, may provide some income in case of disability, but it may not be adequate or timely. It takes around six to eight months to get a decision about benefits, and if you get approved, the average benefit amount is about $1,500 per month.
A significant portion of Americans will suffer a disability that causes them to miss work. Yet very few have disability insurance coverage. Why is this? It isn’t because they are financially prepared for a disability, as we learned from the stats above. Many people have a “this won’t happen to me” mentality. Nobody plans on becoming disabled, either temporarily or permanently. Hopefully you never need to use disability insurance, but it can protect you from financial devastation if you experience a disability while you are working.
Should you get disability insurance?
Not everyone needs disability insurance. We believe that your emergency fund should be able to cover your living expenses for at least three to six months, which negates the need for short-term disability insurance. However, long-term disability insurance can be a smart idea if you are unable to cover your living expenses long-term. Unless you have the ability to retire today, you should consider carrying some form of long-term disability insurance that can cover your living expenses if you unexpectedly become disabled.
How long-term disability insurance works
Long-term disability insurance is pretty straightforward. You can purchase a plan through private insurers, or you may be able to get coverage through your employer at a reduced rate. Long-term disability insurance typically has a waiting period of three to six months, which means you need to be able to cover your living expenses for those first three to six months after you become disabled – that’s where your emergency fund comes in. Determine how much of your pre-disability income you need replaced, and choose a policy that covers that amount or more. Obviously a policy that covers more of your income will typically have a higher premium.
Your line of work determines whether you need an own occupation policy or an any occupation policy. Own occupation disability insurance covers you if you are unable to do your specific job. This is great for those in specialized fields: for example, a surgeon who suffers an injury to their hand will be unable to do their job, but may be able to do other jobs that make far less money. Own occupation policies are great for cases like this.
Any occupation disability insurance kicks in if your disability prevents you from working at all. With a much more strict definition of disability, any occupation policies are cheaper. If you aren’t in a specialized field, or imagine that if you become too disabled to do your current job you won’t be able to do any job, an any occupation disability insurance policy may be right for you.
Disability isn’t something most Americans plan on happening, but it happens more often than you would think, making preparing for the possibility extremely important. While short-term disabilities can be covered by your emergency fund, unless you have the ability to retire today, you may need long-term disability insurance. Choosing the correct policy (benefit amounts, coverage lengths, disability definition) will ensure you are financially protected in the case of a disability.
