The Smartest Insurance You May Not Have

Disability insurance prevents injury or illness from becoming a major financial catastrophe.

After Erin Kerr, an elementary school teacher in Bend, Oregon, dislocated her shoulder on a weekend mountain bike ride last April, she assumed she’d be back to work the following Monday. But a visit with her doctor confirmed otherwise.

Kerr’s shoulder injury required surgery, and the preparation and recovery would keep her out of the classroom through the end of the school year.

Thankfully, the mother of two had signed up for short-term disability insurance. “I thought it would be a good idea a couple years ago – then I just kept renewing it,” she says. That coverage ended up helping to pay for several thousand dollars in medical bills while she was out of work.

Disability insurance can help replace your income if you’re unable to work due to a non-work related injury or illness. For various reasons, it’s often overlooked – young people especially don’t expect health problems will prevent them from working. Yet, regardless of your age, disability insurance can prevent an accident or ailment from becoming a financial catastrophe.

Paycheck Insurance

According to the Bureau of Labor Statistics, 39 percent of workers have long-term disability insurance plans and only 33 percent have short term disability insurance plans. The latter typically covers illnesses or injury lasting less than six months, while the first can provide coverage for the duration of the disability, sometimes until retirement.

You can think of it as insurance for your paycheck. Most policies may even cover between 45 percent and 65 percent of your pre-disability earnings, a report from the nonprofit LIFE Foundation explains.

What’s considered a disability varies. Some policies pay out only in the case of an accident, while others pay out if you’re unable to perform your job for any health-related reason. For example, you could use your coverage to deal with a mental health crisis or provide some much-needed income during maternity leave. Short term disability for pregnancy can be especially helpful given that only 12% of private sector workers have access to any type of paid family leave.

If your employer does offer paid maternity leave, you could also use disability insurance to supplement what you receive. For instance, if you receive three months of leave after the birth of a child, but only six weeks of that leave is paid, short-term disability insurance could help fill the gap.

Determine What You Need

Consider the fact that you have a 30 percent chance of suffering a disability over your career that keeps you out of work for more than 90 days. That could be a major hit to your income, especially since only 38 percent of Americans have enough savings to cover $1,000 in unexpected expenses.

In Kerr’s case, her banked sick leave paid for most of her time out of the classroom, but her disability coverage helped pay for the avalanche of medical bills that followed her injury. “I had a high-deductible insurance plan, so it was incredibly helpful,” she says.

Kerr obtained her insurance via her employer. You can also purchase individual policies if your employer doesn’t offer such a benefit or to supplement an employer-sponsored policy. If you’re self-employed, disability insurance can be especially crucial in providing an income source in the event you can’t work. Most experts recommend a policy that replaces 60 percent to 80 percent of your after-tax, monthly income, though the right amount of coverage depends on your individual circumstances.

Kerr recovered from her accident, is back to teaching – and riding her bike. She now pays close attention to how much disability insurance she carries and plans on buying a bit more just in case. She notes that disability insurance offered her a financial