Disability insurance may seem like just one more layer of protection you don’t really want to pay for. However, as when considering all forms of insurance, it’s wise to ask yourself, “What if?” In this case, what if you lost your income stream, which is arguably your most valuable financial asset. Without it, how would you pay for your home, food, clothing, and all the rest?

The degree to which your income comes from paid work (as opposed to investment income) is the degree to which it is worth considering disability insurance. If illness or an injury made it impossible for you to do your job for an extended period of time, a disability policy would replace a portion of your income.

Could it happen to you?

If you’re young and healthy, you may dismiss the chances of becoming disabled, but consider the following.

  • According to the U.S. Census Bureau, about one in five Americans has a disability; one in 10 has a severe disability.
     
  • According to the Social Security Administration, one in four 20-year-olds will become disabled before reaching retirement age.
     
  • According to the Council for Disability Awareness, 90% of disabilities are not due to accidents; they’re due to illnesses, such as cancer, heart disease, diabetes, arthritis, and dementia.

Still, before allowing such statistics to scare you into potentially overpaying for protection, think about what coverage you may already have.

Short-term needs

Short-term disability policies typically replace most, if not all, of your base income for three-to-six months. Here’s how you may already be protected.

  • An Emergency Fund
    A rainy day fund is typically described as protection against job loss, but it would be appropriate to think of it as protection against a short-term disability as well. If you have six months’ worth of essential living expenses in a savings account specifically earmarked as an emergency fund, you’ve effectively insured yourself against short-term disability.
     
  • State Disability Programs
    Five states—California, Hawaii, New Jersey, New York, and Rhode Island (and the commonwealth of Puerto Rico)—have short-term (six months) disability insurance programs. The programs are paid for by mandatory employee payroll deductions or voluntary employer payments.
     
  • Personal Days
    Does your employer allow you to roll over any unused personal days? If so, and if you keep some in reserve, they could help cover a short-term disability. Some employers also have programs in which employees can donate unused paid time off to co-workers in need.

    A friend of mine who lives in California was recently stricken with bone cancer. During the eight months he was out of work for treatment, much of his income was covered through a combination of the state’s short-term disability insurance program and paid time off donated by co-workers.

Long-term needs

What if an illness or injury prevented you from working for longer than six months? That’s where long-term disability insurance comes in, covering 60-80% of your base salary, potentially up to age 67. There are two forms of long-term disability coverage you may already have, but qualifying for them can be difficult.

  • Workers’ Compensation
    If you suffer a disabling illness or injury that is work related, workers’ compensation insurance is designed to replace some of your salary. All states require employers to provide this coverage. It typically pays about two-thirds of your pre-disability income. However, according to the National Safety Council, 73% of long-term disabilities come about from non-work causes and therefore wouldn’t qualify for workers’ compensation.
     
  • Social Security
    Depending on how long you’ve been contributing to Social Security, you may qualify for disability benefits. (To find out, go to SSA.gov and set up an account.)

    However, the Social Security Administration (SSA) uses a strict definition of disability. You have to be unable to work “due to a severe medical condition that has lasted, or is expected to last, at least one year or result in death.” The condition has to prevent you from doing the work you used to do or from “adjusting to other work.” Only the most severely disabled are supposed to qualify.

    Processing an application for disability benefits can take three-to-five months and the SSA says 65% of applications are denied. For those who do qualify, benefits tend to be modest. In 2015, the average monthly disability payment was $1,165.

Buying more protection

If there’s a gap between your need for disability insurance and the coverage you already have, see if your employer offers a group plan. Typically, a group plan will be less expensive than buying an individual policy.

Just keep in mind that such coverage probably will not be portable. If you leave your employer, you’ll lose your coverage. Also, if you are a high-income earner, be sure to understand your policy’s limits. Normally, a group long-term disability policy will replace 60% of your base salary up to a monthly cap of $5,000. That may be far less than your current monthly income. If you decide to shop for an individual policy, whether to supplement a group plan or because your employer doesn’t offer coverage, here are key factors that will affect the price.

  • Waiting Period
    This is the amount of time you’ll need to wait for benefits to begin after becoming disabled. A typical waiting period is 90 days, but a longer waiting period, made feasible by a healthy emergency fund, will lower the cost of the policy.
     
  • Benefits Period
    You can choose a policy that will pay benefits up to age 67 or 65, or for a more limited period, such as two, five, or 10 years. Policies with shorter benefit periods cost less.
     
  • Benefit Amount
    Just because you qualify for a certain monthly benefit doesn’t mean you need to accept that much. If you have other sources of income, you may only need a lesser amount.
     
  • How is disability defined?
    Some policies use a very broad definition, such as the inability to work any job you are qualified for. Some define it more narrowly, such as the inability to perform your current job. While it’s the more expensive option, you’ll probably want an own occupation policy, which pays if you’re unable to perform the “material and substantial duties of your own occupation.”
     
  • Riders
    Among the various add-ons available, you may want to consider an inflation rider, which adds an automatic cost-of-living increase to the monthly benefit each year. You may also want protection in case you can’t work full-time, but you can work part-time. A residual disability benefit rider would pay a portion of the difference between your new lower income and how much you used to make.

Where to purchase

If you decide to buy disability insurance, talk with people you know who have coverage and ask if they’d recommend working with the agent or company they used. Several online providers are available as well. (This Wall Street Journal article has some recommendations.) It would be wise to get quotes from several providers.

Wrapping up

As we’ve counseled before when writing about long-term care insurance, your choice is not between carrying a full-featured policy and no policy at all. You could pick up some coverage, perhaps opting for a policy that would pay benefits for just five years, for example. After all, according to the Council of Disability Awareness, three years is the average length of a long-term disability claim. That may be a cost-effective way to take at least some of the financial sting out of a disability.