Insurance is a funny thing. You learn all you can, shop diligently, scrape together the money to pay for it, and then hope you’ll never have to use it.
In addition to health and automobile coverage, most people insure their lives so that in the event of their death, those who depend on their income will not be left high and dry.
Term life insurance, the insurance of choice for all us cheapskates, is relatively cheap because so many people pay for it who never use it. The insurance companies invest all of those premiums, make an obscene fortune doing so, and end up paying out far less than they take in.
Face it, folks: These days, with medical technology what it is, the odds increase every day that a disease or accident that would have killed you a decade ago will now leave you disabled—alive but unable to work.
Unfortunately, many of us will need disability income protection sometime before we die. One out of every 4 of today’s 20-year-olds will be incapacitated for at least a year before they reach age 65. Without insurance, a disability could spell financial disaster.
A recent study reported in the American Journal of Public Health found that 66.5 percent of all bankruptcies in the U.S. (approximately 530,000 households per year) were due to medical issues—either because of high costs of medical care, time out of work, or both.
Why It’s So Expensive
Disability insurance is far more expensive than term life insurance. In fact, it rivals the more-expensive whole life insurance but does not offer the dubious advantage of cash values. No wonder so many people overlook this most important of all insurances.
Disability insurance is relatively expensive because there’s a much higher probability you will use it. With life insurance, most people underestimate their life span, so they end up buying insurance they will never use. Or they buy ridiculously expensive insurance, such as whole life or universal life, and then drop it the minute they go through a financial downturn.
But when it comes to disabilities, people of all ages have equal risks, which means it is more likely you will need it at some time. If you are in a two-breadwinner household, it is likely you need disability insurance more than life insurance, given how expensive it can be to care for a disabled person.
How It Works
Standard disability insurance is fairly straightforward. If you are unable to work and are found disabled as defined by the policy, the insurance company replaces a specific percentage of the income you would have earned had you not been disabled.
In the same way that health, auto, and life insurance policies have unique provisions, exclusions, and stipulations, there are all kinds of provisions in a disability policy that you should consider carefully. Generally speaking, the lower the premium, the greater the number of exclusions and stipulations. Consider them carefully, and never consider anything you do not fully understand.
What to Look For
No. 1: Guaranteed and non-cancelable. This type of policy will have a fixed premium and will stay in effect as long as your payments are kept current, regardless of health issues or other variables.
No. 2: Insures for your occupation. Make sure your policy protects you against your inability to work in your own occupation; otherwise, your insurer will not pay you unless you can’t work at all.
No. 3: Payment increases. You want a rider on your policy that provides for payment increases to keep up with inflation and also in sync with your income. If you bought the policy when you made $25,000 and make $85,000 when you suffer a disability, you want to make sure you are covered at the $85,000 level.
No. 4: Pays until retirement. Some disability policies pay for only a specific period of time, say, 5 or 10 years. The best policy is open-ended and continues as long as you are disabled, until retirement age.
Even if you feel you are not in a position to take on another expense at this time, think about it. Do yourself a favor and find out what it would cost.
Ask friends or relatives for a referral to an agent or disability insurance carrier. Query your current insurance carrier. It will cost you nothing to do the homework.
Mary invites you to visit her at EverydayCheapskate.com, where this column is archived complete with links and resources for all recommended products and services. Mary invites questions and comments at EverydayCheapskate.com/contact, “Ask Mary.” Tips can be submitted at Tips.EverydayCheapskate.com. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog and the author of the book “Debt-Proof Living.” Copyright 2021 Creators.com