Is disability insurance worth it?

Disability insurance isn't a topic that comes up often in daily conversations (or even many financial ones). After all, none of us plan on becoming ill or injured to the extent we can no longer work. But the fact is that the unexpected can happen at any time, and when it does, it can be financially devastating if we aren't prepared for it.

You want to be able to meet your financial obligations and take care of your family in these situations, but you also need to consider your budget here and now. With this in mind, you may find yourself wondering if it's worth investing in a disability insurance policy. To answer that question, you must understand a few things.

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Is disability insurance worth it?

Keep the following in mind when deciding if a disability insurance policy is right for you.

What is disability insurance?

Disability insurance is a type of insurance that provides financial support if you're unable to work due to an injury or illness. Policies vary, but generally, they pay a portion of your income while you're unable to work. You can use the funds you receive for whatever you like, from daily living expenses to medical bills.

How does disability insurance work?

Disability insurance provides you with partial income replacement if you're unable to work due to an accident, illness or injury. The amount you receive and the length of time you receive it depends on the type of policy you have. 

There are two main types of disability insurance: short-term and long-term. Short-term disability insurance typically lasts for a few months to a year. Long-term disability insurance can provide income replacement for years or even until you retire.

Disability insurance premiums are typically based on a percentage of your income, and the amount of income replacement you receive is also based on your income.

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Pros and cons of disability insurance

Disability insurance provides several benefits but also comes with drawbacks you must consider.

Pros

• Financial security: Disability can happen to anyone and at any time, not just older workers or those with risky jobs. Having a disability insurance policy in place safeguards your financial future.
• Peace of mind: Disability insurance can provide a safety net in the event an unexpected injury or illness prevents you from working. This can be especially valuable if you have dependents who rely on your income.
• Flexibility: There are many ways to customize a disability insurance policy, enabling you to create one that fits your needs and budget.

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Cons

• Cost: The price of disability insurance can vary depending on factors like your age, occupation and the amount of coverage you want. On average, disability insurance costs between 1% and 3% of your annual income. If you're older, have a higher income or work in a high-risk job, it could cost more.
• Exclusions: Some disability insurance policies may not cover pre-existing conditions or certain types of disabilities. In addition, some may have strict requirements or limitations on what qualifies as a disability.
• Waiting period: Some policies have a waiting period before you can receive benefits, which can leave you without income replacement if you become disabled during that time.

The bottom line

Disability insurance can be a valuable tool to help protect your income and support your family if you're unable to work due to an injury or illness. However, the decision is ultimately a personal one. Consider your financial situation, age, occupation and dependents when weighing whether a disability insurance policy is right for you. A financial advisor can help you weigh the pros and cons against your needs.

In the end, disability insurance may seem like an unnecessary added expense, but it could prove to be invaluable should the unexpected occur.