Ask most people to name their most valuable financial asset and they’ll say their home, their investments, or their savings. But for most working adults, their most valuable asset is actually their ability to earn income. A 30-year-old earning $60,000 per year will earn approximately $2.1 million over a 35-year career, assuming no raises. Disability insurance protects that enormous stream of future income if illness or injury prevents you from working.
What Is Disability Insurance?
Disability insurance replaces a portion of your income — typically 60–70% — if you become unable to work due to illness or injury. Short-term disability (STD) policies cover periods from a few weeks to up to a year. Long-term disability (LTD) policies cover periods extending years or even to retirement age. For most people, long-term disability coverage is the more critical protection.
The Probability Is Higher Than You Think
Many people underestimate their risk of disability because they associate it with catastrophic accidents. But most long-term disability claims result from illnesses — cancer, heart disease, mental health conditions, and musculoskeletal disorders — not accidents. Statistics suggest a 1-in-4 chance of experiencing a disability lasting 90 days or more before reaching retirement age. It’s a significant risk that most people don’t adequately insure against.
Employer-Provided Coverage
Many employers provide group disability insurance as an employee benefit. Review your coverage carefully: typical group policies pay 60% of your base salary and may have income caps. If your employer provides coverage, that’s a good start — but for many higher earners, 60% of salary is insufficient, and a supplemental individual policy may be warranted.
What to Look for in a Policy
Key policy features include the definition of disability (own-occupation policies pay if you can’t perform your specific job; any-occupation policies only pay if you can’t do any job), the benefit period (how long payments last), the elimination period (how long you must be disabled before benefits begin), and whether benefits are tied to inflation. Own-occupation coverage is more expensive but offers significantly better protection for professionals with specialized skills.
Individual vs. Group Policies
Individual disability insurance policies are more expensive than group coverage but are portable (you keep them if you change jobs), offer more favorable terms, and provide benefits that are generally tax-free. Group policies through an employer are less expensive but typically less favorable in their terms and are lost if you leave your employer.
Disability insurance is the protection that most people hope they’ll never need — but those who do need it and don’t have it often face financial catastrophe. If you have dependents or significant financial obligations, protecting your income with disability insurance is essential financial planning.
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