Reader Question: Do I Need Disability Insurance?

Autumn writes: Hi Miata, Our financial advisor is pressuring me to buy disability insurance. I have some through my day job already. Isn’t that enough?

Autumn, you’re right to question your financial advisor… not because disability insurance is unnecessary (I’ll tackle that in a moment), but because you shouldn’t ever feel pressured by your advisors. While advisors may disagree with you about a course of action, their job is to give you the data you need to make good decisions.Disability Insurance

In this case, I do believe that the data supports your advisor’s assessment.

Here’s the hard fact: according to Cornell University, an astonishing twelve percent of Americans reported a disability in 2012. Twelve percent! People wonder why disability costs are so high…it’s because insurance companies think chances are high it’ll happen to you.

For someone like you, working in a day job and then presumably working on your craft as well, having disability coverage is even more important. Why? You’re relying on that day job to support your work. Without adequate income coming in, I’ve found many of my readers would be unable to continue pursuing the art they love.

“But I Have A Policy At Work”

Disability insurance is a complex topic. Most people’s work insurance policy simply isn’t enough. There are a few reasons for this:

1) Workplace insurers are trying to cover the bare minimum, not what you need. You should look through the fine print of your work policy. You’ll probably be surprised to find that there are often caps to the amount of support they’ll provide.2) The amounts of money they’ll offer, even without fine print provisions, are often much lower than what you’ll be able to live on. Start with your budget. Can you live on the amount of your disability income policy? If not, you’ll want more.
3) Workplace policies are often offered pre-tax (this lets the business write off the premium payments). That means you’ll have to take taxes out of the money you receive. For many people, that’s 15 – 25% of the benefit you receive going back to the government. As you can see, you’ll have less than you think.

Costs and Benefits

I’ll warn you…when you hunt for disability insurance, you’ll probably be surprised to find that it’s expensive. Many people decide they don’t want coverage because they “can’t afford it.” Sadly, this is exactly the wrong opinion. Why?

Insurance companies are great at making a profit. Sure, it’s a competitive business, so they have to keep rates in line with others, but they know how to make sure they’ll be able to keep offering insurance tomorrow. They’ve done the math on you and price disability insurance expensively because they think it’ll happen to you. In general, you want to buy insurances that are expensive and avoid ones that are cheap. Pet insurance? Pass. Accidental death and dismemberment? Do you really need double the money if you lose a finger? P

ass (just buy better disability coverage…). By focusing on probabilities of something happening, you’ll only have a few insurances… and they’ll probably be expensive, but worth it.

Ask your insurance company about own occupation protection. I like this disability benefit because it ensures the policy will pay out if you can’t do your job… not just if you can’t work. Imagine that you’re hurt in a fire and can no longer complete your skilled job, but you CAN still get a job in fast food or elsewhere. An insurance company can deny a claim because you’re able to work. With own occupation protection, you’ll receive a benefit if you can no longer complete your stated job.

I also like policies that offer inflation adjustments. The price of bread goes up every year. While hopefully you don’t have a problem for a long time, if you don’t have a policy that offers an increasing benefit, you’ll have to buy more insurance in the future. My goal? I prefer to deal with this stuff once and forget about it. More time to focus on the things you really care about!

Overall Advice

So, here’s what I’d do, Autumn. I’d review your budget and workplace insurance coverage to determine just how much of a disability you’d be able to cover. If there’s an additional need, I’d then hunt for a supplemental policy to cover the rest.

Thanks for your question!