How Much Disability Insurance Do I Need?

Even savvy consumers sometimes overlook or underbuy disability insurance. You may focus on your auto, home and health needs, which is understandable but short-sighted. Disability insurance is essential to most Americans, particularly those with limited savings.

Many consumers are in denial about their potential need for disability insurance. In reality, 1 in 4 workers who are age 20 today will be disabled before they reach age 67. If you become disabled, you will need long-term disability benefits unless you have significant savings. If you have long-term disability coverage, you will still need short-term benefits as well because long-term benefits usually take months to kick in.

The recent COVID-19 pandemic has also highlighted the necessity of disability coverage. Those with mild cases may recover in a few weeks. Others with more severe cases are frequently out for six weeks or more. Medical professionals are also researching long-term effects such as heart damage in those that recover. Some COVID-19 patients may want to consider both short- and long-term disability coverage due to all of these factors.

Certainly, you should purchase enough coverage to protect you and your family in case you do suffer from a disabling injury or illness. Government benefits will not give you the protection that you need. A combination of savings and strong insurance policies are your best strategy.

Short-term Disability

Short-term disability is designed to pay a portion of your salary if you are unable to work due to a non-work-related injury or illness. Work-related issues are usually covered under Workers' Compensation. Your employer may offer you this type of insurance, but they are not required to except in five states: California, Hawaii, New York, New Jersey and Rhode Island. If your employer doesn't offer this benefit, you can purchase coverage individually from a licensed agent.

Policies vary widely, with coverage usually extending from three to six months and paying out at a 60% level. Some policies allow you to pay more for a higher level of benefits. Ideally, your short-term policy benefits will last until you are able to resume work or until your long-term disability policy kicks in.

Your benefits typically don't begin until you've served an elimination period of a week or two after initially missing work. Short-term disability policies are a great help, but they certainly don't replace your salary. If you can plan your absence, such as for a knee replacement, you'll be better able to handle the financial challenges. You will need significant savings to survive without a short-term disability policy.

Long-term Disability

Many injuries or illnesses last for months or years. In fact, those sidelined by a long-term disability are unable to work for an average of 34.6 months. In most instances, accidents are not the primary cause of long-term disability. Often, conditions such as cancer, heart disease and pregnancies lead to the need for this type of coverage.

The benefit level depends on how much coverage you choose to purchase and the limits of the policy, but the usual level is 60 to 70% of your salary. Insurance companies do not offer 100% salary replacement due to the prohibitive costs involved.

Again, these policies vary when it comes to the duration of the coverage. Some employer policies may have a ten-year limit while others may cover an employee up to age 65. Usually, your long-term policy will not pay out until you've been disabled for six months or more.

These benefits are often available only to employees who have been with the company for a stated period of time. You rarely begin your employment with disability coverage. Also, those who work fewer than 30 hours a week are usually not offered protection.

If your policy is an employer-sponsored plan, you have to actively choose to participate. Your enrollment is not automatic, so be certain to ask HR about your options.

Social Security Disability

You should not confuse private and employer disability plans with Social Security plans. The federal government offers both Social Security Disability Insurance and Supplemental Security Income. SSD is a benefit for those who have worked for a certain number of years during which they paid into the system. SSI is a plan that pays depending on financial need.

While these programs are a necessary support for many citizens, they are not a replacement for your own policy. Getting this coverage is often a long process, and many are denied, at least initially. Also, the level of benefits is relatively low. The average SSI payment is $551 per month, while the average SSD payment is $1251 per month. These relatively modest amounts don't cover basic necessities for most families.

Workers' Compensation

Disability insurance and worker's compensation are two entirely different programs. Workers' comp is state-mandated for companies of a certain size in certain industries to cover work-related injuries and illnesses. These laws differ from state to state. Federal workers have their own workers' compensation coverage. If you severely break a leg while on the job, you may be covered by these programs. If you suffer a compound fracture at home, your employer or individual policy should cover part of your lost salary. Ideally, you will have both types of coverage so that you will be financially supported any time you lose work for weeks, months or years due to an injury or illness.

Disability Coverage Amount

Most disability policies allow you to purchase coverage only up to 70% of your salary. Depending on several factors, that amount may allow you to pay your expenses without incurring extra debt. If you are living paycheck to paycheck, that 30% reduction of income can be devastating. Plus, your expenses may rise during your illness or injury recovery due to increased healthcare needs such as medication and numerous copays. Financial advisors always suggest that you have a three-month cushion of savings stashed away, but many Americans cannot manage that much. In fact, up to 78% of US workers live paycheck to paycheck.

Also, it is important to remember that employer policy benefits will be taxed just as your salary would be. That reality comes as an unpleasant surprise to many policyholders. However, the government doesn't touch private policy payments since you purchased them with funds that have already been taxed. No matter what policy coverage you have, you can expect to receive significantly less than your salary. You will need additional funds.

Policy Costs

Like all insurance policies, disability plan costs differ depending on how much coverage you purchase and personal information such as age and health. You can expect to spend between 1 - 3% of your yearly salary for this coverage. If you earn $50,000, that means you'll be paying $500 - $1500 per year. You may be tempted to opt-out of these plans because you are already seeing big paycheck deductions for health insurance and payroll taxes. However, chances are that you will need this protection at some point in your working career. Even a short period without a paycheck can cause devastating financial losses.

It is also important to understand how long the coverage lasts and how many weeks you'll have to go without any benefits. Remember, the coverage does not immediately kick in when you become disabled. Also, different policies define "disabled" differently. As always, you should take a deep dive into the policy's summary of benefits and coverage (SBC) before purchasing any plan.

Final Note

How much disability insurance do you need? The answer is as much as you can reasonably get. Unless you have significant financial resources, even a month away from work can crush your financial health. And if you do have savings, a prolonged recovery or illness can soon consume them. Some illnesses are lifelong. Everyone should have some level of disability insurance.

Although the government offers Social Security disability, qualifying can be difficult and the benefit amount is often low. Counting on federal funds to cover your expenses is a risky proposition. You need your own employer or individual plan.

Comparison shopping for coverage is the best way to find policies that work for you. PolicyScout lets you find affordable disability insurance coverage in a matter of minutes. You simply enter your zip code and answer a few simple questions. The app will show you multiple policy options, allowing you to purchase this essential protection.

Life is too uncertain to continue without disability insurance. The cost of no coverage is more than you can afford.