Is Disability Insurance More Important than Life Insurance?

 

Do you have a financial plan in place for your family in the event that you develop a disability and are unable to work for a significant period of time – perhaps permanently?  If not, you might want to get one – ASAP!

Many parents (although by no means all) protect their family from the consequences of an untimely death by purchasing life insurance.  Far fewer have meaningful disability insurance to protect against the possibility of a disabling health condition.  Yet, statistically, you’re far likelier to develop a disability during your child-rearing years than you are to die.  According to the Social Security Administration, a 20-year old has a one in four chance of becoming disabled at some time before retirement age.  On the other hand, American men have a one in 6 chance of dying between the ages of 25 and normal retirement age; for women:  1 in 9.

While none of these statistics are comforting, and they can vary significantly depending on genetics and lifestyle, they can serve as a sobering wake-up call for those of us (really, the majority of the population) who assume that we will live a long, healthy life.

The reality is that misfortune can hit anyone at any time.  Imagine if you were in a car accident and suffered a head injury, or if you were diagnosed with a disabling autoimmune disease (which often develops during childbearing years).  What would be the effect on your family’s financial situation?  Would you be able to continue paying your mortgage (or rent)?  Would you be able to afford private school for your child or after-school activities?  How about summer vacations?  If you don’t know the answers to these questions, you should talk to a financial adviser or come up with your own plan for what your family would do.

Types of Disability Insurance

If you decide that long term disability insurance is necessary to protect your family, make sure you purchase a policy that will cover your needs.  In general, there are two types of policies:  own-occupation and any-occupation.

An own-occupation policy pays benefits if you suffer a disability that renders you unable to continue in your current occupation.  If you are a teacher, this type of policy would pay benefits if you were unable to teach.  If you are a lawyer, it would pay benefits if you were no longer able to practice law.

An any-occupation policy is much more limited: it pays benefits only if you are unable to work in “any occupation.”  If you could no longer practice law, but you could work at McDonald’s or a call center, the policy pays nothing.  This type of policy may be useful if you were to suffer a catastrophic injury, but it provides no benefit in the more likely situation that you suffer a disability that prevents you from working in your current job, but is not completely incapacitating.

For most families, an own-occupation policy is the best way to protect your family against the financial hardship that can accompany a disability.  Talk to a financial adviser or an insurance agent about different options for this type of policy.  The policies may vary in terms of waiting periods before payments would begin and the percent of your salary that the policy pays.

Unfortunately, there’s no insurance policy that can prevent us from becoming disabled or dying at an early age.  (A healthy lifestyle can help, but it’s no guarantee).  However, we can put a plan in place so that, in the event something does happen, it would not be financially devastating for our family.

About the Author

Shannon McNulty

Shannon McNulty is the founder of Savvy-Parents.com and a lawyer in New York City who provides legal planning for parents with young children. Shannon received her J.D. from Georgetown University Law Center and her LL.M. in Taxation from NYU School of Law. She has also earned her CERTIFIED FINANCIAL PLANNER(TM) designation. You can learn more about Shannon and her firm at www.cityparentslaw.com.

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