Why Disability Insurance is the most Important Insurance to have

Probably the tell tale indicator as to why I would say that is that it is also one of the more expensive insurance products out there.  That may sound like a strange reason, but you have to understand that insurance companies price policies based on how much it is likely to cost THEM if you make a claim, the probability of you making a claim and so forth – plus a little is added to make sure they pull in a profit. So if an insurance product is expensive, it basically means that either the payout is big, the likelihood of claim is big, or both.

But there is more to my statement than just cost. You have to understand that your biggest asset in life is not your house, your car or your investments (at least when you are younger).  Your biggest asset is your ability to earn an income for the rest of your life!

Speaking of assets – you insure your house, you insure your car, you even buy insurance in the form of warranty extensions on electronics.  You would have NONE of these items if you didn’t have an income! And I’ll bet you don’t know all the details about your Disability Insurance offered through work (if you are lucky enough to have that).

Let’s throw out an example:

Let’s say a proper disability insurance plan will cost you $2,000 per year, and you make $50,000. Statistically, for a 30 year old the odds of you becoming disabled for more than 3 months is 1 in 3, and the average disability lasts 32 months (almost 3 years). So you have to look at it like this:

Would you rather earn $50,000 when you are healthy and $0 if you become disabled?

OR

Would you rather earn $48,000 when you are healthy and $48,000 if you become disabled?

I’ll get some real life numbers and post them in a new post to give you a better look – I’ll also go more into the features of Disability Policies (the bells and whistles) – there are a lot of useless options, but some are good. While the insurance is important, it never hurts to get the most bang for your buck!

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 4 comments
  • peter mcmaster

    This only applies if one’s work place does not provide disability insurance. My company covers 2x my annual incme so I wold not bother buyin any

  • Preet

    Thanks for the comment Peter. I’m wondering if perhaps you are referring to your company provided Life Insurance coverage as routinely they will provide 1, 1.5 or 2 times your annual salary as part of your benefits package. This would be paid to your beneficiary upon your death.

    Disability coverage is provided as a percentage of your gross or net income (usually 60%) and paid on a monthly basis. You can contact your HR department for more details…

    …and stay tuned for more information on Disability Insurance which I will be adding.

    Thanks,

    Preet

  • sam

    hi preet,
    are disability & critical illness the same..
    i got an offer today from manulife for critical illness
    which covers sone 22 ailments..
    but the offer does not give montly disbursements..but a single disbursement of $125,000..premium for a 10 year renewable is approx $50 per month for first 10 years..

    i am about to accept it…but am curious now if disability insurance is something separate from critical insurance..

    thanks
    sam

  • Preet

    There is some overlap, but there are different.

    Disability protects your ability to have an income up to age 65 (in most cases). The cause of the disability can be from a critical illness (such as heart attack, cancer, stroke, etc.), or it can be from getting in an accident – anything that would preclude you from being able to work.

    Critical illness on the other hand pays out a one time lump sum should you get diagnosed with a covered condition and survive 30 days (i.e. don’t die). You may or may not go back to work – it doesn’t matter.

    I would top up disability before buying critical illness. If you get critically ill to the point where you can’t work, you are covered through your disability.

    Also note that we live in a country with very good healthcare no matter the wait times and all the complaints. Yes, it could be better, but you know that you won’t get bankrupted if you break a leg. So if the rationale is to pay for an MRI cross border, they are only $500 bucks and you don’t need an appointment – trust me, I know firsthand.

    Having said that, there are many people who do get critical illness insurance, but again, I would spend more money on getting proper D.I. coverage or topping it up first, then the Critical Illness.

    Criticall Illness and Long Term Care Insurance, to ME, are not as necessary as D.I. and term life. They are more for peace of mind as opposed to preventing a catastrophe.

    Hope that helps. I really have to get on with writing that post on Disability Insurance… :)