Why Some Millennials Need Disability Insurance
May 17, 2017 4:57 p.m. ET
You’ve probably gotten the pitch for life insurance before but haven’t thought much about what would happen if you got seriously hurt and weren’t able to work.
Disability insurance tends to take a backseat to life insurance among young adults who feel invincible, but it makes sense for a lot of millennials. Just over one in four 20-year-olds will become disabled by age 67, according to the Social Security Administration. Think about all the expenses you’d have to take care of, and how difficult it would be to cover them without a salary.
“For many millennials, the biggest asset they have is their earnings potential,” says Dan McElwee, a certified financial planner with Ventura Wealth Management in Ewing, N.J.
If you lose the ability to work, you’ll still have to find a way to bring in income and buy food, cover rent, and provide for any dependents. You also have your student loans to think about. Those are the only type of loan that you can’t go into bankruptcy for, so you’ll need to pay them off somehow.
You may already have some disability coverage that’s given to you by your employer, but most likely it isn’t enough, says Bob Gavlak, a certified financial planner with Strategic Wealth Partners in Columbus, Ohio. In many cases, such policies won’t pay out more than 60% of your income in the event you become unable to work — and on top of that, you’ll be taxed on what you receive, since your employer is the one paying the premium.
Getting disability benefits from the government can be onerous and take years, and those benefits may not cover your full expenses.
If your employer doesn’t provide disability coverage, you can expect to spend about 2% or 3% of your salary on a policy that you buy yourself. Such a policy will pay up to 70% of your income. If your employer does have you on a plan, you can pay less than that 2% amount and buy yourself a policy that fills the gap between what your employer plan covers and the 70% maximum.
Shelling out even 2% to 3% of your income for an insurance policy may seem like a lot, but Gavlak says to think of it as if you’ve received competing job offers. One company will pay you 100% of your salary but give you nothing if you get sick or hurt. Another company will give you 98% of the salary but 70% if you lose the ability to work. Most people find that it makes sense to give up a little income to get that safety.
The importance of disability insurance grows if you have a family that depends on your ability to bring in money. “If you aren’t carrying any sort of disability insurance, you’re opening your family up to issues,” McElwee says.
As with any insurance product, there are many available options. Policies will have different lengths, and you’ll have to pay more depending on how long you’re covered for. Some plans only pay out for five or ten years, while others last until you turn 65, Gavlak explains.
Policies are also very specific about your ability to go back to work after becoming disabled. Some will only pay out if you’re unable to work in any capacity, while others cover you as long as you aren’t able to do your specific job, like a surgeon who hurts his arm in a car accident.
“The stigma with disability insurance is thinking that I’m never going to need this because I work at an office job and even if I break my leg, I could still do work at the office,” Gavlak says. But “a lot of things could happen that won’t kill us but would inhibit our ability to work.” Disability insurance is a way to protect yourself in case that happens.