While most people are familiar with the concept and need for life insurance, few take the time to investigate coverage for disability. Yet the facts show that if you are under retirement age, disability for an extended period of time is far likelier than death.
For example, at age 22 the odds are seven times greater that you will suffer a serious disability of three months or more than you are to die during the year. At age 30 the odds are 50 percent that you will be laid up for three months or more before age 65. At age 42, your chance of suffering a serious disability before reaching 65 is three times greater than that of dying.
Disability insurance provides income while you are out of work due to an injury or illness. As you would expect from the high odds mentioned above, disability insurance is not cheap. For a 30-year-old the rates run about $15 to $30 a year for every $100 of monthly coverage. For example, if you need $3,000 per month to meet your regular expenses, the annual premium would run from $450 to $900. Rates jump much higher as you grow older. The same coverage for a 40-year-old can run as much as $1,500 to $2,000.
While many employers offer some type of disability coverage with their group plans, these often fall far short of what you really need. Typically, they will pay no more than 60 percent of your salary.
Self-Insuring for Income Loss
Your first thought may well be that your employer's sick leave policy will cover all you really need. But remember the statistics we listed above: disability periods of three months and longer are very possible. Few companies provide full pay for extended leaves.
By now you are familiar with the concept of self-insurance. When it comes to disability you can self-insure by determining how long you could support yourself in your present financial condition. It is possible and profitable (lower premiums) to use a waiting period before the policy starts making payments to you. The longer the waiting period, the lower the premiums.
For example, if you need $2,000 a month after taxes to pay normal living expenses, and you have $4,000 saved in an emergency fund, you can support yourself for two months. If your employer's sick leave policy will pay for one month, you can stretch out the waiting period for three months. The industry norm is 90 days. As a rule of thumb, trimming your waiting period to 30 days from 90 will cost you about 20 percent more. Stretching out the waiting period to one year will cut your premiums about 20 percent.
As a consumer, I understand the inconvenience of shopping around for an affordable life insurance quote and the frustration of having limited choices, but shopping around is worthwhile.