Step 61: Disability Insurance

A disability insurance provides you with financial compensation in the event of a disability that stops you from going back to work. It covers your future wage by paying a certain percentage of your wage, often around 60-70%,  either until you are able to go back to work again or for as long as the policy contracted states that you are entitled to the compensation.

There could be several reasons for somebody being unable to work, including illness, medical conditions or after an accident. The difference with a medical insurance is that the latter only covers your medical bills, not the fact that you no longer have an income to support you financially. In some cases and countries social security might offer a disability coverage, but conditions vary greatly and it might not kick in until after a certain time, sometimes not even til after a year.

Do you need disability insurance?

The chances of becoming disabled before retirement age can be 2 – 3 times higher than the odds of dying before retirement age so there is a relatively big chance you might become disabled at some point. Due to this high chance, disability insurance tends to be fairly expensive. There are several situations in which you might not need disability insurance, including:

• If you have enough savings to tie you over for quite a while (remember that a disability could last for several years however).
• If you don’t rely on your income or could live off just your partner’s income for a while.
• If you don’t currently have an income and therefore don’t need to insure it.
• If social security in your country /state has a disability payment
• If your wage is relatively low and if unemployment benefit might cover you instead.

Types of disability insurance?

Of course there are again different types of insurance and different factors to look at. The two main points to consider include

• Duration of the coverage: A disability coverage can be short-term or long-term, with short-term coverage only paying between a few months up to a few years, whereas long-term insurance covers you for years or even all the way up to the state pension age if you want.
• Definition of disability: Disability can be defined in different ways and it is very important you are aware of the coverage you contract. Disability insurance can grant payment using one of these criteria:
  • Own occupation coverage: Disability if you are unable to continue in your current profession.
  • Any occupation coverage: Disability if you are unable to do a similar job in a similar setting / industry taking into consideration your education level and training.
  • Some policies also define disability as being unable to work altogether. In this case you have to prove that you can’t take on any job, not even one that is unrelated to your previous training and / or work experience.

How to get disability insurance

You can generally get insurance in the following four ways:

• Social security disability payment – provided by the state.
• Through your employer – you might have disability insurance via your employer either automatically or you might be able to contract this insurance via your employer at a discounted rate.
• Professional associations – depending on your occupation, these might offer disability insurance specifically for your profession or industry.
• Private insurance – if you don’t have any of the above or if you want to supplement what you have or just arrange it yourself, this is of course an option to look into.

Step 61 – Disability Insurance – in detail

• Go through the list above under “Do you need disability insurance?” and check whether it makes sense for to get this type of insurance. Make sure to check the following:
  • current unemployment benefits and regulations.
  • social security disability benefits and regulations.
  • make sure that if you would be entitled to any of the above you are well aware of the amounts as well as the conditions (i.e. when would you be entitled to these payments, how long for and what do you need to do in order to claim these?).
• Find out what disability insurance you already have through your employer (you might have this automatically so if you aren’t sure, go and find out!), through any professional organizations or privately. Find policies, conditions and payment details. Check the following details as well:
  • does it adjust to cost of living / inflation?
  • how much of your pay would be covered
  • does it cover your profession. Some industries might not be covered, especially in the case of high-risk professions such as certain sports instructors and construction workers
  • can you make changes after a while, i.e. if you have insured your current wage but have a substantial increase in your wage at some point, can this be changed?
• Think about how much cover you’d need. If you insure a lower percentage, the premium will be lower. You might be able to cut costs if you don’t work and get rid of some expenses (such as travel expenses) completely. Bear in mind however that if you become disabled and can no longer  work, your contributions to things like savings, pensions and investment might also end.
• If you can’t protect all of your desired income, you might still want to consider taking out a coverage that at least would cover a small part of your income, even if it is only to cover the rent or mortgage.
• Remember that you only need a disability insurance until your official retirement age. After that time even though you might still want to work, there is no point keeping the policy.
• Another important point to remember is that it is generally easier and cheaper to take out disability insurance when you are young and healthy.
• Consider getting professional advice from a certified independent financial advisor to discuss how much you should take out and make sure you check the company you’re buying from is solid and trustworthy and has good customer reviews as you’d be relying on their money for a long time to come!
• Once you’ve decided to contract or change your current disability insurance, schedule in time to fill in all the necessary paperwork this very same week.
• Schedule in a review of this insurance once a year to make sure all is still up to date and that any wage increases (or decreases) have been taken into consideration.

Here ends our mini-series on insurance policies. We’ve looked at the five most common types of insurance to consider. Of course there are many other types of insurance around but many of these you probably don’t ever need. That said, everybody’s situation is different so always check it out yourself and make your own decisions based on what is best for you and your family.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.