Every week in March, we’ll post on how much insurance you may need. While this question can challenge and confuse even the most financially savvy individuals, planning ahead is the best way to provide the peace of mind and support your family needs. It allows you to stay confident and powerful over your future, regardless of what life brings.

Today we’re focusing on disability insurance. In our experience, this is one of the most neglected areas of financial planning. Many families are more vulnerable to disability than they realize. By preparing for this all-too-likely possibility, you are not only protecting your family and your finances, but you are also staying in control of your future.

Who needs it?

Disability is overlooked by many families. And it’s widespread: 1 in 5 Americans live with disabilities, and 1 in 10 with severe disabilities. While 1 in 9 American 20-year-olds will die prematurely before retirement age, over 1 in 4 will become disabled [1].

Disability is often more costly than premature death. Not only is there a loss of income, but there are often increased medical and other expenses associated with the disability. In 2006, the average disabled individual in the U.S. faced an additional $11,637 of disability-associated healthcare expenses [2]. The toll of caregiving can be a great burden on a family, both emotionally and financially. In 2013, the estimated value of unpaid care from family members in the U.S. totaled $470 billion [3].

While almost every worker needs disability insurance, it is especially important for individuals in certain high-risk occupations such as construction, logging, and aviation. Others are at high risk because a relatively minor injury could prevent them from working. An emergency surgeon, for example, may become unable to work after straining an ankle, while an architect could continue practicing. 

What options are available?

When an individual becomes disabled, they often qualify for a benefit through Social Security. However, this benefit was never designed to provide for all of your costs in disability. In the beginning of 2015, Social Security paid an average disability benefit of $1,165/month, just enough to keep the beneficiary above the poverty line [4].

As a result, most should consider disability insurance. The two kinds of disability insurance are short-term and long-term. Short-term disability insurance provides a benefit for a few months, usually 3 to 12 months. This kind of coverage is usually offered through employers. Long-term disability insurance, on the other hand, provides regular payments for as long as you need care, often until age 65.

Disability insurance comes in group and individual. A group policy covers a large number of individuals and is usually offered through a company or professional organization. Because the policy is spread over multiple workers, it is less risky for an insurance company and so has lower premiums. Some employers will also cover part or all of the premiums. An individual or private policy, on the other hand, is purchased by one person. It can be quite expensive, as the insurance company is guaranteeing only one individual’s income. Often, if you have group coverage, it is most cost-effective to enroll in that coverage up to the max first before considering private coverage.

How much do I need?

There are many factors to consider. Similar to life insurance, the first is how much income your family will lose. This depends on your earnings and the length of time you plan to continue working. A 30-year-old has a higher insurance need than a 60-year-old a few years out from retirement.

Consider any sources of income other than your salary. This would include a spouse’s income, rental income, royalties, and dividends. All of this income can help your family pay the bills.

The next major factor is other liquid assets, such as savings accounts, CDs, and investment portfolios. Your family could draw from these savings to meet their expenses. On the other hand, if you have relatively low savings, life insurance is even more important.

Also, consider your family’s planned expenses. If you have young children, would they need to attend daycare as your spouse goes back to work or increases his or her hours? Are you planning to send your children to college, and do you have savings available to cover this expense? Do you have a mortgage, student loans, or other debt that you’d like to pay off to give your family peace of mind? Would you like to provide support for your parents as they age? Purchasing disability insurance can provide for these costs and allow your family to carry out your wishes without a financial burden.

In addition, disability often bring its own costs.  Physical therapy, special equipment, or home modifications (such as handrails or a stairlift) may be required. Unless prescribed by a doctor, these costs are often not fully covered by health insurance. Certain disabilities may also require that a friend, family member, or paid caregiver assist with activities such as eating, bathing, dressing, or transportation.

[1] https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf

[2] https://www.cdc.gov/ncbddd/disabilityandhealth/data-highlights.html

[3] https://www.aarp.org/content/dam/aarp/ppi/2015/valuing-the-invaluable-2015-update-new.pdf

[4] https://www.ssa.gov/disabilityfacts/facts.html