Most of us know enough to draw up a will, especially if we have dependents to protect. But what a majority of folks fail to do is to secure disability insurance, something they are far more likely to need. Don't believe me? Then try these statistics on for size:
- According to the Social Security Administration, "a 20-year-old worker has a 3-in-10 chance of becoming disabled before reaching retirement age."
- One in seven Americans can expect to be disabled for five years or more before retirement, according to the Health Insurance Association of America.
- Disability causes nearly 50% of all mortgage foreclosures, compared to just 2% caused by the death of the primary breadwinner, according to Health Affairs.
I learned about the need for disability insurance firsthand when I was just 30 years old. Newly married and in great health, I didn't give a single thought to disability insurance. Luckily, my employer did. When I became pregnant later that year, I was put on bed rest for the last two months of the pregnancy, and my husband and I were covered. We had plenty of things to worry about health-wise; what a great relief not to worry about finances, too.
Contrast that to just a couple of years later when I worked for a new employer without disability benefits. Pregnant with our second child, what the doctors pronounced a fluke the first time around became a reality again -- bed rest for four months this time. (That's eight missed paychecks, to be exact.) Our family wasn't financially ruined, but we were extremely financially stressed.
Could you weather four months without a paycheck and still emerge OK? Given that an estimated two-thirds of American households live paycheck to paycheck, the odds are that your household would greatly miss your financial contributions. What if your disability lasted even longer -- years, not months?
If that thought has you worried, you should get busy looking into disability coverage. Here are the questions you'll want to consider:
- Does my employer offer any disability benefits? Group coverage is much less expensive than what you'll be able to secure privately. As an alternative, check into whether any of the professional organizations you belong to offer a group rate.
- Do I need short-term or long-term coverage? If you can only choose one type of coverage, go for the long-term disability policy. You're much more likely to be able to cobble together money to live on for a few months (ideally, you have an emergency fund for just such an occasion) than to replace a career's worth of income on your own.
- Will Social Security cover me in the event of catastrophe? The odds aren't good. In order to collect disability, your disability must be so serious that you can never work again. What's more, you'll have to support your claim with well-documented medical records. Sometimes it can take years to prove your case. In short, Social Security coverage isn't a slam-dunk.
- What do I need to look for in a long-term policy? There are a number of questions you'll want to ask about an existing policy through your employer or a policy you can secure on your own. For example, you'll want to know if it covers you through age 65, if it's non-cancellable (they can't yank it away unless you don't pay), and if the policy includes riders for cost of living (addressing inflationary concerns) and loss of income (the difference between your old salary and the presumably lower salary you can command post-disability).
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Fool contributor Elizabeth Brokamp is a licensed professional counselor who regularly talks money with her honey, Robert Brokamp, editor of The Motley Fool's Rule Your Retirement newsletter and co-advisor of Motley Fool Green Light. The Fool has a disclosure policy.
