New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 17,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

Don’t Forget About Disability Insurance

A fundamental principle of financial planning is that insurance comes first. If you don’t have the proper insurance, you can do everything else exactly right — save a large percentage of your income, invest that savings wisely, engage in excellent tax planning, etc. — and still end up financially ruined if you find yourself on the unlucky side of a large uninsured risk.

Of course, you don’t need every type of insurance. For example, if there is nobody else who is financially dependent upon you — as would be the case for many people with no children — you most likely have no need for life insurance.

But if you have a job, there’s a good chance you are dependent upon the income from that job — and therefore have a significant need for disability insurance.

A 2014 “actuarial note” from the SSA estimated that, for a person who reached age 20 in 2013, there is only a 6.5% chance of dying prior to full retirement age but a 27% chance of becoming disabled prior to full retirement age.

And the above estimate uses the SSA’s definition of disabled, which states that you must be unable “to do any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” There are plenty of people who incur injury or illness that meaningfully reduces their income yet who do not qualify for Social Security disability benefits.

In addition to being difficult to qualify for, Social Security disability isn’t particularly generous in terms of amount paid. You can get an estimate of what your Social Security disability benefits would be (if you became disabled right now) by signing into your online SSA.gov account. The average monthly Social Security disability benefit is $1,172. That’s a heck of a lot better than nothing, but even with other forms of government assistance, we’re talking about a serious financial struggle in most cases.

So how many people actually have private disability insurance? Last year an article by Stuart Heckman in the Journal of Financial Planning looked at the 2013 Survey of Consumer Finances from the Federal Reserve Board to answer that question (and many other related questions). Heckman found that only 30% of households had private disability insurance (i.e., insurance beyond that provided by Social Security). Interestingly, he also found that people who use a financial planner are not significantly more likely to own disability insurance.

My overall point here is just to provide a basic reminder: don’t forget to consider disability insurance. Do you have it? If not, should you?

If you do end up shopping for disability insurance, you should know that there’s a lot of variation from one policy to another. This Bogleheads wiki article provides a brief explanation of the most important considerations.

New to Investing? See My Related Book:

Book6FrontCoverTiltedBlue

Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less

Topics Covered in the Book:
  • Asset Allocation: Why it's so important, and how to determine your own,
  • How to to pick winning mutual funds,
  • Roth IRA vs. traditional IRA vs. 401(k),
  • Click here to see the full list.

A Testimonial:

"A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing." - Taylor Larimore, author of The Bogleheads' Guide to Investing
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2017 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy