Disability and [[life insurance]]: Protecting Your Earning Power
Your ability to earn income is your most valuable financial asset. A 30-year-old earning $60,000 will earn over $2 million before retirement. Protecting that income stream—and your family if something happens to you—is fundamental to financial security.
The Case for Disability Insurance
Watch Out
You're more likely to become disabled than to die before 65. Yet most people have life insurance but skip disability coverage. A disability that stops your income can be more financially devastating than death.
The Statistics:
- 1 in 4 workers will become disabled before retirement
- Average disability lasts 2.5 years
- Most disabilities are from illness, not accidents
- Top causes: back injuries, cancer, heart disease, mental health
Without Disability Insurance:
- No income while unable to work
- Depleted savings and emergency fund
- Possible bankruptcy
- Loss of home
- Derailed retirement
Understanding Disability Insurance
Short-Term Disability (STD)
Covers the first few months of disability:
| Feature | Typical Coverage |
|---|---|
| Waiting Period | 0-14 days |
| Benefit Period | 3-6 months |
| Benefit Amount | 60-70% of salary |
| Common Source | Employer-provided |
Long-Term Disability (LTD)
Covers extended disabilities:
| Feature | Typical Coverage |
|---|---|
| Waiting Period | 90-180 days |
| Benefit Period | 2 years to age 65 |
| Benefit Amount | 50-70% of salary |
| Common Source | Employer or individual policy |
How They Work Together
Timeline Example:
| Period | Coverage |
|---|---|
| Days 1-7 | Sick leave/PTO |
| Days 8-90 | Short-term disability |
| Day 91+ | Long-term disability |
Key Disability Insurance Terms
| Term | What It Means |
|---|---|
| Elimination Period | Waiting period before benefits start |
| Benefit Period | How long benefits are paid |
| Own Occupation | Disabled if you can't do YOUR job |
| Any Occupation | Disabled only if you can't do ANY job |
| Non-Cancelable | Insurer can't cancel or raise rates |
| Guaranteed Renewable | Can't be canceled but rates may increase |
Pro Tip
"Own occupation" coverage is crucial. If you're a surgeon who can't operate but could work as a consultant, "any occupation" coverage would deny your claim. "Own occupation" would still pay.
How Much Disability Coverage Do You Need?
Target: 60-70% of pre-disability income
Why not 100%? Benefits paid with after-tax dollars (if you pay the ) are tax-free. 60-70% of gross often equals close to your .
Calculation Example:
| Factor | Amount |
|---|---|
| Annual Salary | $80,000 |
| Monthly Salary | $6,667 |
| Target Coverage (60%) | $4,000/month |
| Employer Provides | $2,000/month |
| Gap to Fill | $2,000/month |
Getting Disability Insurance
Employer-Provided (Group)
Pros:
- Often free or subsidized
- Easy to get (no medical exam)
- Automatic enrollment
Cons:
- May only cover 50-60% of base salary
- Doesn't cover bonuses/commissions
- Benefits may be taxable
- Lost when you leave job
- May be "any occupation" definition
Individual Disability Insurance
Pros:
- Portable (stays with you)
- Often "own occupation"
- Tax-free benefits (if you pay premium)
- Customizable coverage
Cons:
- More expensive
- Requires medical underwriting
- Must actively purchase
Best Strategy: Take employer coverage AND supplement with individual policy.
Disability Insurance Red Flags
Avoid This
Watch out for:
- "Any occupation" only - Much harder to qualify for benefits
- Short benefit periods - 2 years may not be enough
- No protection - Benefits lose value over time
- Mental health exclusions - Common cause of disability
- Waiting until you're older - Premiums increase, health may decline
- Relying solely on Social Security - SSDI is hard to get and limited
Life Insurance Basics
Who Needs Life Insurance?
You likely NEED life insurance if:
- Someone depends on your income
- You have a spouse or partner
- You have children
- You have co-signed debt
- You want to leave an inheritance
You likely DON'T need it if:
- No one depends on you financially
- You have enough assets to cover final expenses
- Your spouse can support themselves
Types of Life Insurance
[[term life insurance]] Insurance
Pure death benefit for a set period:
| Feature | Details |
|---|---|
| Coverage Period | 10, 20, or 30 years |
| Premiums | Fixed for term |
| Cash Value | None |
| Cost | Very affordable |
Best for: Most people—income replacement, payoff, children's expenses.
[[whole life insurance]] Insurance
Permanent coverage with cash value:
| Feature | Details |
|---|---|
| Coverage Period | Lifetime |
| Premiums | Higher, fixed |
| Cash Value | Builds over time |
| Cost | 5-15x more than term |
Best for: Very high-net-worth individuals with estate planning needs.
Universal Life Insurance
Flexible permanent insurance:
- Adjustable premiums and death benefit
- Cash value tied to interest rates or market
- More complex than whole life
Best for: Those with specific estate planning needs.
Pro Tip
For 95%+ of people, term life insurance is the right choice. It's affordable, simple, and provides the coverage you need. "Buy term and invest the difference" in low-cost .
How Much Life Insurance Do You Need?
The DIME Method
D - Debt: Total debts (mortgage, student loans, car loans) I - Income: Years of income to replace (10-15 years typical) M - Mortgage: Remaining mortgage balance E - Education: Future education costs for children
Example:
| Category | Amount |
|---|---|
| Debts | $30,000 |
| Income (10 years × $80,000) | $800,000 |
| Mortgage | $250,000 |
| Education (2 kids) | $200,000 |
| Total Needed | $1,280,000 |
Subtract existing coverage and assets:
- Employer life insurance: -$160,000 (2x salary)
- Spouse's assets: -$100,000
- Additional Coverage Needed: $1,020,000
Rules of Thumb
| Situation | Coverage Multiple |
|---|---|
| Single, no dependents | 0x (or minimal) |
| Married, no kids | 5-10x income |
| Married with kids | 10-15x income |
| Stay-at-home parent | $250,000-500,000 (childcare value) |
Term Life: Choosing the Right Policy
Term Length
Match to your longest financial obligation:
| Situation | Suggested Term |
|---|---|
| Young with kids | 20-30 years |
| Mortgage payoff | Match mortgage term |
| Near retirement | 10-15 years |
| Kids almost grown | 10 years |
Getting Quotes
Shop around. Prices vary significantly:
Sample Monthly Rates ($500,000, 20-year term, excellent health):
| Age | Male | Female |
|---|---|---|
| 30 | $25 | $20 |
| 40 | $45 | $35 |
| 50 | $110 | $80 |
Where to Buy:
- Independent brokers (compare multiple companies)
- Online quote tools (Policygenius, SelectQuote)
- Direct from insurers
The Application Process
- Get quotes from multiple companies
- Complete application (health questions)
- Medical exam (blood, urine, measurements)
- Underwriting review (2-6 weeks)
- Policy issued with final rate
Tips for Best Rates:
- Quit smoking (rates can be 3-4x higher)
- Healthy weight improves rates
- Avoid hazardous activities before application
- Be honest—lies can void the policy
Life Insurance Mistakes to Avoid
Avoid This
- Only having employer coverage - Lost when you leave job
- Buying whole life when term is sufficient - Waste of money
- Not enough coverage - Running out before need is gone
- Waiting too long - Rates increase with age
- Letting policy lapse - Keep premiums current
- Not reviewing beneficiaries - Ex-spouse may still be listed
- Cash-value as investment - Returns are poor
Social Security Disability (SSDI)
Government disability benefits exist but are limited:
Requirements:
- Unable to work for at least 12 months
- Have enough work credits
- Cannot do any "substantial gainful activity"
Average Benefit: ~$1,500/month (2024) Maximum Benefit: ~$3,800/month
Reality Check:
- 65%+ of initial applications are denied
- Appeals take months to years
- Benefits are limited
- Don't rely on SSDI as your plan
Creating Your Protection Plan
Quick Win
Your Insurance Action Plan:
Disability Insurance:
- Check what your employer provides
- Calculate your coverage gap
- Get quotes for individual policy if needed
- Ensure "own occupation" definition
Life Insurance: 5. [ ] Calculate coverage need (DIME method) 6. [ ] Subtract existing coverage 7. [ ] Get term life quotes (multiple companies) 8. [ ] Apply while young and healthy 9. [ ] Review beneficiaries annually
General: 10. [ ] Keep policies organized and accessible 11. [ ] Tell family where documents are 12. [ ] Review coverage at major life events
The Bottom Line
Insurance isn't exciting, but it's essential. Disability insurance protects your earning power—the asset that funds everything else. Life insurance protects those who depend on you. For most people, employer disability coverage plus a supplemental individual policy, combined with term life insurance of 10-15x income, provides solid protection. Get coverage while you're young and healthy—your future self (and family) will thank you.