When people think about buying insurance, they usually start with the most common – homeowners, auto, health, and life insurance. Too many times, long term disability insurance gets forgotten.
You're insuring your house, your cars, your health, and your life. Arguably, long term disability insurance should be one of the first things you buy. Disability insurance protects you against loss of income. Let's face it. If you don't have any income, you won't be able to pay all of the premiums for all the other insurance you own.
Maybe you feel like you don't need it. Perhaps you have a large emergency fund, a big investment portfolio, and other forms of supplementary income. Statistics tell us you're among the minority if you have those things. And even then, do you want to use that to cover lost income? Wouldn't it be better to preserve those funds for retirement?
If you've never considered disability insurance, I encourage you to look into it.
My goal in this post is to give you a working knowledge of disability insurance, why you need it, and the best type of insurance to buy.
Let's start with the basics.
Do You Need Disability Insurance
Statistics would suggest that you do. A study from the Council on Disabilities shows the following statistics:
- At least 51 million working adults in the United States are without disability insurance other than the basic coverage available through Social Security.
- Only 48 percent of American adults indicate they have enough savings to cover three months of living expenses in the event they're not earning any income.
- Almost half of all American adults indicate they can't pay an unexpected $400 bill without having to take out a loan or sell something to do so.
The study goes on to cite the consequences of these disabilities are enormous:
- A 2014 study of consumer bankruptcy filings identified the following as primary reasons: medical bills (26%), lost job (20%), illness, or injury on the part of self or family member (15%).
- A 2013 study of bankruptcy filings in Washington state found that cancer patients were 2.65 times more likely to go bankrupt than people without cancer, with younger (under age 50) cancer patients having the highest rates of bankruptcy10.
Note: Go to the article to see the sources for the statistics.
What is Disability Insurance
In simple terms, disability insurance is income replacement insurance. In other words, if you lose your job because you become disabled, you will have a percentage of your lost income replaced with your disability insurance.
There are two basic types of disability insurance – short term and long term disability.
Short Term Disability
As the name suggests, short term disability insurance replaces your income over a short time. Short term can mean anywhere from a few months up to one year. There usually is a waiting period of around 14 days before coverage starts. In other words, your disability would keep you from work for at least 14 days.
Employers often provide short term disability insurance to their employees. There is no one size fits all coverage. Waiting periods, costs, and the number of years of the coverage differ for each policy. Some policies replace 100% of your regular income during the coverage period. Others replace a set percentage.
Check with your employer to see if they offer it and how it works.
Long Term Disability
A long term disability is designed to cover serious injuries that last a long time. How long and how much coverage you have depends on the policy. Typically, it lasts as long as you pay the premiums, and as long as the disability lasts. If you get better and can go back to work, the insurance would stop paying on that claim.
Like short term disability policies, long term coverage provides income replacement that might be anywhere from 40% to 80%. The waiting period (called the elimination period) can be from 30 days to 365 days.
Many times, the elimination period would coincide with when the short term coverage ends. So, if your short term policy ends in six months, the long term policy would start in six months. In other words, the elimination period would be six months.
Where to Buy Disability Insurance
Like life insurance, the saying goes that disability insurance isn't bought, it's sold. The inference is that consumers aren't smart enough to figure it out on their own. I disagree.
With that said, to buy any kind of insurance, you need to work with a licensed insurance agent. In the past, that meant finding a local agent who sells the type of insurance you want to buy. Many local insurance agencies try to be all things to all people. They want you to buy your home, car, health, life, and disability insurance from them. It's the proverbial one-stop-shop.
Not all agents are the same. In my mind, it's best to work with someone who specializes, especially when it comes to something like disability insurance.
You can buy disability insurance, like many other things online. There are numerous online life insurance marketplaces. There aren't nearly as many places online to shop for disability insurance.
The two that stand out are Policy Genius and Breeze. Our top pick for disability insurance online is Breeze.
Breeze specializes in long term disability insurance. Disability policies offered come from two of the oldest mutual insurance companies – Principal Financial Group and Assurity Group. Both of these companies have been around since the late 1800s (1879 for Principal, 1890 for Assruity). Mutual insurance companies are owned by the people they insure. That means they don't cater to stockholders trying to increase their net worth. They work for the people they insure.
In the past decade or so, there are far fewer insurance companies offering disability insurance. That's in stark contrast to companies selling life insurance, which have grown considerably in the last decade. That's especially true of companies offering life insurance online.
Life insurance is relatively easy to price. Disability is not. May companies stopped offering disability polices because they mispriced them and lost money., Those that remained, like Principal and Assurity, priced their policies appropriately and have thrived in the disability insurance world.
Conflicts of Interest
In many cases, agents have conflicts of interest that tempt them to put their interests ahead of yours. The most common conflict of interest comes from how agents earn money. It's typical for insurance agents to work on commissions. That means when you buy a policy from them; they make a percentage of the premium you pay as a commission. In general, the higher the price, the higher the commission.
There are thousands of agents compensated this way. The vast majority of them do an excellent job of finding the right policy for your needs. However, many don't. If possible, you want to remove the temptation of the person with whom you work from trying to push a higher-priced policy than you need or want.
Breeze's agents do not work on commissions. They earn a salary. They have no incentive to push you into a higher-priced product, so they make more money. That increases the odds that you will get what is right for your situation.
To me, it makes more sense.
Breeze has a very streamlined and straightforward application process. It takes less than 5 minutes to get an initial quote for insurance. I completed an application in less time than that. The process asks several short questions. They are not complicated questions. Once you've answered the questions, you a quote for coverage with three options based on the answers. Here's what that looks like:
At the top, you see their recommended waiting and coverage periods. They show three monthly income options based on the salary you input.
Clicking the more coverage options brings you to this screen:
When you change the options, you'll see changes in the premiums of your policy. If you need a medical exam, you'll see that indicated near the top (as in the example below).
Going through the process took less than five minutes. As you can see, there are many additional options you can add. If you don't understand these options, see below for where to find answers.
I've said it many times. An educated consumer is a better consumer. If you don't understand what you're about to buy, either find the answers to questions that will help or look for something different.
The Breeze platform offers several resources to help you get the knowledge you need. Here's one example of what that looks like.
These are not posts designed to drive you to a particular product. They are there to help you learn about what you're buying before you purchase it.
If you still have questions after searching their online resources, reach out to the Breeze customer support team. You can call, email, or chat with a representative. They are there to help. The last thing you want to do is buy something you don't understand. Many online businesses promise exemplary customer support. Breeze stands behind that promise.
When it comes to disability insurance, there are many options out there. No matter who you choose to work with, be sure the companies they represent are financially stable. Be sure they've been in business for a long time and will be there if you ever file a claim.
If you prefer to work with someone in person, find an independent agent who specializes in long term disability insurance. Preferably, choose an agent who is on salary.
The team at Breeze meets all of these criteria. If you're in the market of disability insurance, do yourself a favor. Check out Breeze.
Fred started the blog Money with a Purpose in October 2017. The blog focused on three primary areas: Personal Finance, Overcoming Adversity, and Lifestyle. During his time at Money with a Purpose, he was quoted in Forbes, USA Today and appeared in Money Magazine, MarketWatch, The Good Men Project, Thrive Global and many other publications.
In April 2019, Fred, along with two other partners, acquired The Money Mix website. To focus his time and energy where he could be the most productive, Fred recently merged Money with a Purpose with The Money Mix. You can now find all of his great content right here on The Money Mix, along with content from some of the brightest minds in personal finance.