Disability Insurance

According to the Social Security Administration, a 20-year old faces a 1-in-4 chance of becoming disabled prior to retirement. Qualifying for Social Security disability benefits is sometimes challenging. Even then, the monthly Social Security benefit can be as little as $700 per month -- the average benefit is about $1,500. Private disability insurance can provide some additional income replacement, and it does not reduce your Social Security benefit. (However, workers compensation payments will reduce your Social Security benefit.) Private disability insurance is useful if your family depends on your paycheck. However, there are many different types of coverage and policies to consider.

Your best bet is to purchase private disability insurance through your employer. Even if you qualify for Social Security disability benefits, it will replace only 20% to 40% of your income. So look for a private policy that covers at least 50% of your income. Some policies have a yearly cap on that amount they will pay, and so check that out as well. The best policies are “noncancelable” and so your premiums cannot increase if you become disabled. Alternatively, your policy might “guaranteed renewable,” which is usually cheaper, but it also means that the insurer can raise rates, provided that they raise them on non-disabled people as well. Also, an ideal policy offers a cost-of-living allowance that provides protection against inflation, which is beneficially if you are disabled for the long term.

Should your employer not offer disability insurance or their policy is lacking, you can buy into an individual plan. But these plans tend to be more expensive because insurers assume that only sicker people buy them. These policies can cost between $100 - $200 a month but often include some of the features noted above that might be lacking in your employer-based plan.

Even if you qualify for disability, you might have to wait up to two years before receiving  benefits. Hence, don’t forget to also have an emergency account. Ideally, your emergency account would cover at least 3 months of expenses, potentially up to 6 months if your job is not very secure or safe. Having a good emergency account also allows you to skip buying a “short-term” disability plan that only provides benefits for a brief period of 30 to 90 days.

Kent Smetters

Kent Smetters is the Boettner Chair Professor at The Wharton School of the University of Pennsylvania, the Interim Faculty Director of the Penn Wharton Public Policy Initiative, and a Faculty Research Fellow at the NBER. He was the former Deputy Assistant Secretary of the U.S. Department of the Treasury, and he subsequently served as a member of the U.S. Congress’ bipartisan Blue Ribbon Advisory Panel on Dynamic Scoring. Kent holds bachelor degrees in Economics and Computer Science from The Ohio State University as well as an MA and PhD in Economics from Harvard University. He previously cofounded a national registered investment advisory firm that built a new technology platform, grew the firm to over 50 advisors and then sold the firm to a large, publicly-traded company. Growing up in a financially poor family, Kent donates his time to “Your Money” to help families work, save and set goals in order to achieve the most in life. Kent is often cited in major news outlets.