01 Jul How disability insurance protects your income

 Q. How can I decide if disability insurance is worth the cost? My employer doesn’t offer any. My wife and I both earn about $60,000 a year.

A. Financial advisors will tell you if you can afford the premiums, disability insurance is absolutely worth the cost.

Let’s look at your question in a different way: Can you afford not to have disability insurance?

Ask yourself how your monthly expenses would get paid if one of you were unable to work and earn an income for just 12 months, said Matthew DeFelice, a certified financial planner with U.S. Finanical Services in Fairfield. Or what would happen if both of you were in a car accident together and neither could work while recovering?

“Unless you have enough liquid assets between savings and investments that you can self-insure if no income were coming in, then the odds are you need to have some disability coverage in place,” he said.

The effects of a disability can be financially devastating, even more so than premature death.

“The fact is that more Americans file for bankruptcy protection because of an unexpected illness or injury than for any other reason,” DeFelice said. “Nearly one in three people ages 35 to 65 will suffer a disability that will prevent them from working for at least 90 days. One in seven people between the ages of 35 and 65 will become disabled for five years or more.”

Those are some pretty scary statistics.

“Disability insurance protects your most valuable asset — your ability to earn an income. So, yes, it is worth the cost,” said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

He offers this comparison: Let’s say you have two salary options: A) $60,000 annually but $0 if you become disabled, or B) $57,500 annually and if you become disabled, you’d receive $35,000 annually.

“It’s really that simple. If you can qualify, it is always worth protecting your income,” Gaelick said.

He said actual costs depend on many factors such as occupation, income level, health, smoker versus non-smoker, age, plan design (benefit chosen, elimination period, benefit period, options), travel and carrier.

“The question you should ask yourself is, ‘Will getting the protection give you enough peace of mind to offset the pain of the premium?” he said. “No crystal ball, so why not ensure you’re protected in the event of a disability?”

DeFelice said as a financial planner, he can map out the best financial plan money can buy you, outlining a budget, tracking how much you are saving, putting away for retirement and/or college education for the kids, etc. But as a couple still working and in the “accumulation” phase, your incomes are the driving force of that plan.

He said if your income goes away because you became sick or injured, then you have no plan. All of it is meaningless unless you have contingencies in place to protect yourself.

“We buy insurance without hesitation on our health, on our life, on our cars, on our homes, even on our iPhones,” DeFelice said. “Why wouldn’t we buy insurance on what is likely most folks’ biggest asset – the ability we all have to earn an income for the rest of our working careers.”

DeFelice said while costs and benefits vary, you should generally expect to pay between 1 and 4 percent of your gross income for a good quality disability income insurance policy that will cover approximately 60 to 65 percent of your salary.

“Also keep in mind that disability benefits are tax-free as long as you pay the premiums with after-tax dollars,” he said.

Unlike life insurance, disability insurance contracts have a lot of moving parts that can affect how and when that policy will pay you benefits, so make sure you work with a professional who knows the product and understands what he/she is selling you, DeFelice said.

“It is also helpful to find someone who is an independent agent who is licensed to sell disability insurance with multiple carriers instead of a captive agent who only sells products from one company, so he/she can shop the market and find you the most competitive premiums,” he said.

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This story was first posted in July 2015.