You insure your most valuable assets like your home, your car and your life. Most people would agree that they’re worth protection; however, disability income (DI) insurance is something people tend to be less certain about. They’re not sure if they really need it, or if it’s worth the cost. So, is it? There’s no cut-and-dried answer, but there are some strong arguments to be made in favor of DI.
What are the chances you’ll need it?
When you think about the kind of disability that could keep you from working, usually the first thing that comes to mind is a car accident or other catastrophic injury — in other words, something that could happen, but most likely won’t.
In reality, the most common cause of disability is illness, not accidents or injuries. Arthritis, back pain, neurological problems and cardiovascular illnesses are all more common than injuries when it comes to disability claims.1 And disabilities are more common than you might think. In fact, one in four 20-year-olds will become disabled before they reach retirement age, according to the Social Security Administration .2 You probably know someone who’s had to take time off from work for medical reasons, even if it’s not permanent.
What is DI?
DI, when you boil it down, is insurance for a portion of your income. And your income — more than your car, or home or any other big ticket item — is your most valuable asset. It’s what pays for your essential expenses like housing, food, utilities, clothing, transportation, as well as your not-so-essential ones. Your income may help support members of your family, too. Think: tuition, childcare, medical bills, etc.
Even if you don’t think of your annual salary as particularly large, over a lifetime it adds up. For example, a 35-year-old making $50,000 a year will make $1.5 million between now and retirement at age 65. And that’s not even accounting for the occasional raise or bonus.
If you had to stop working due to a disability, the income you’re earning now simply wouldn’t be there anymore. You’d have to find another way to cover your living expenses and to support the people who depend on you. That’s where DI comes into play.
What about other options?
Of course, there are a few other sources of income you might be able to draw on if you become disabled. Many people have what’s called group long-term disability insurance through their employer. This can be a helpful benefit, but there are some important things to remember.
First, if you leave for another job, you may not be able to take your disability coverage with you and your new employer may or may not provide the same benefit. Second, if your employer pays for the policy, the benefits you would receive if you became disabled would be taxable.
Most important, the kind of disability insurance you get from work typically only covers about 60 percent of your income, not including any bonuses or commissions you may normally receive. The other 40 percent is up to you.
You might be thinking that there’s always savings. If you have enough money in the bank to cover your living expenses for more than a month or two, you’re in better shape than the large majority of Americans. If you don’t, you’d need to consider another option. Also keep in mind that the average disability lasts a lot longer than the one-to-two month range. The average duration for all MassMutual DI claims is four years.4 Most people’s savings would run out long before that.
Can I afford it?
When you’re already paying for other kinds of insurance — home, auto, life, etc., — it’s hard to think about buying more. But a good way to frame it is what DI costs vs. what the benefit would be if you used it.
Here’s a hypothetical: Say a 30-year-old man, taking home $56,250 a year buys a disability insurance policy that costs him $929 per year. (By comparison he could be spending $985 a year on a daily coffee, assuming an average price of $2.70.5)
If he becomes totally disabled, after a 90-day waiting period he could receive $4,050 a month over 12 months, replacing about 86 percent of his pre-disability, after-tax income — and hopefully allowing him to keep up his coffee habit.
There are, of course, some limitations and eligibility requirements for DI. So in the end, it’s a matter of whether you feel like the benefit you could receive outweighs the cost of premiums and the uncertainty that comes with not having any coverage at all. Costs and benefits vary from policy to policy.
Protecting your most valuable asset
With any luck, you’ll never have to deal with a disability that keeps you from being able to work. But it’s a good idea to have a plan in place, so that if you ever did become disabled you could still cover your expenses and provide for the people who count on you.
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This article was originally published in October 2016. It has been updated.
1 Council for Disability Awareness, “Chances of disability,” March 28, 2018.
2 Social Security Administration, Publication No. 05-10570, January 2019.
3 MassMutual DI claims based on claims incurring from 1986 – 2016.
4 Square, "States Where You Can Find the Cheapest Cup of Coffee," Sept. 29, 2015.
The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.