Disability insurance

Disability insurance

Americans lack disability insurance

However, general disability insurance that pays benefits directly to you is probably something that more Americans should look into. If you became disabled and unable to work, how would you provide for yourself and your family?

This is a question that people don't seem to be asking because most Americans don't have supplemental insurance that would replace their income in the event of a disability. I say "supplemental" insurance because most working Americans already qualify for disability insurance provided through Social Security.

Ways to get by without disability insurance

Many sellers of disability insurance will tell you that the Social Security Administration rejects about half of the initial claims for Social Security disability benefits. This is true, but many of those claims are probably meritless to begin with.

It's hard to imagine that you'd be turned down for coverage if you're truly disabled. However Social Security disability benefits don't start until your sixth month of the disability, so you'll need your emergency fund. Also, don't expect these Social Security benefits to be sufficient to maintain your pre-disability lifestyle.

The average Social Security benefit for a disabled worker with a spouse and two children is only $1,100 a month. This may not be enough to support a family, but there are other ways to manage your risk without buying disability insurance.

First, your company already may provide you with disability coverage, and you may qualify for workman's compensation if injured at work. You can also tap into money in your IRA and other retirement accounts without penalty if you're disabled.

Additionally, if you're the sole breadwinner of the family and your spouse looked after the kids, you may be able to swap roles if you become disabled. Even with a disability you might be able to do light work around the house while your spouse re-enters the job market.

Finally, with the increasing use of computer technology for the disabled, there may be no reason why you couldn't become gainfully employed despite your disability.

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Drawbacks to disability insurance

Still, many people should think about the need for disability insurance. For example, if you're single and can't rely on a spouse, you may want to consider buying disability insurance. Such insurance, however, has some drawbacks.

The first is its high cost. A middle-aged person making $40,000 a year would pay something like $1,500 a year for disability insurance.

The second problem is the definition of "disability". Many policies are set up so that they will pay only if you're totally disabled. If you can still do light office work, for example, you won't get paid.

The final drawback is that you probably won't get everything you may think you're paying for. Most disability policies reduce your benefits by the amount you receive from Social Security or other sources.

You can get insurance that will pay if you can't perform your current profession, but this is expensive. The classic example is the surgeon who's become accustomed to a rich lifestyle and wants to protect it in case she injures her hands. She can buy such insurance if she wants, but it will be costly.

Purchasing disability insurance is a decision based on your circumstances. Blanket generalizations can't be made. But if you decide you need it, remember these things.

First, stick with a big deductible. In disability insurance the deductible is called an "elimination period". This is the initial length of time when your insurance company won't pay you benefits. If you have a 30 day elimination period and a bad back has you out of action for only two weeks, you won't collect any benefits.

Longer elimination periods reduce your premiums. Here's another place where you can put your emergency fund to use to save money on premiums.

Also, you should look for a disability policy that has some inflation protection in it. You also may need a policy that only pays benefits until age 65. After that, you may be able to replace disability payments with Social Security retirement benefits.