Bajtelsmit Column: Who Will Pay the Bills If You’re Disabled?

Note to Editors: Vickie Bajtelsmit is a finance professor in the Colorado State University College of Business and the author of three personal finance books.

If you or your spouse were unexpectedly out of work due to an illness or injury, would you be able to pay the bills? Most families today are dependent on two incomes, so losing one could be a big problem.  

Most people vastly underestimate their risk of disability and are therefore unprepared financially.  In fact, more than 30 million people in the US report a disability and at least 8 million miss work because of their disability. If you are 40 years old, you have more than a 50 percent chance of being disabled for three months or longer prior to age 65.  For women, the risk is higher.

In the case of a work-related injury, worker’s compensation insurance from your employer will provide income replacement under some circumstances.  

However, most disabilities are due to illnesses like cancer and heart disease. Your job may give you sick days that will help out in the beginning. If you’re lucky, your employer may offer disability insurance as part of a benefit plan. The very seriously disabled may eventually qualify for disability benefits from Social Security.  

But what if you’re self-employed or don’t have disability insurance through work. In that case, disability income insurance might just be the most important kind of insurance for you to have in place. For young and healthy people, it’s not that expensive.

The cost of your disability income insurance will depend on your profession, your age, and your current health status.  The amount of protection you need will depend on the degree to which your family is dependent on your income and also on what other sources of funds you have to meet short term income shortfalls. One thing to keep in mind is that your disability benefit will not be subject to income tax if you pay the premium with after-tax dollars.

Here are a few key things to consider when shopping for individual disability income insurance:

-Definition of disability: You should probably buy "own occupation" insurance which will pay you the benefit if you are unable to work on your own occupation, even if you can work at something else.  The Social Security definition of disability is much more stringent-you can’t be able to work in "any occupation."

-Waiting period: This is how long you have to be disabled before you can begin getting income replacement. The longer the waiting period, the cheaper the insurance.

-Benefit duration: A policy might pay benefits for a maximum of two years or it could be for much longer, such as to age 65 or for life. The longer the benefit duration, the more expensive the policy.

-Income replacement: How much will the benefit be? It can be a specified dollar amount, such as $2,000 per month, or it can be a percentage of your pre-disability income, such as 60% or 65%. If you pick a dollar amount, you should opt for a cost of living increase feature.

-Renewability: If your health deteriorates, can the insurer drop your insurance policy? A guaranteed renewable feature is very important.  

We all hope that bad things won’t happen to us. But since the odds are pretty high that you may be disabled at some time in the future, it’s a smart financial move to protect your household assets with this type of insurance.