Disability insurance: Here's how to protect 'your biggest asset'

One reminder the pandemic has brought up is that an illness can develop into a long-term disability that can strike both old and young people.

But a large portion of Americans aren’t financially prepared for this not-too-uncommon outcome, leaving their families vulnerable.

Almost half of Americans said their family would suffer financial hardship in less than six months if the primary wage earner became sick or injured, according to a recent study by LIMRA and Life Happens, a nonprofit educating consumers about life, disability, and long-term care insurance.

One in 10 would feel a financial hardship within a week of losing a job to disability, according to the study, with millennials, Hispanics, and those earning below $50,000 at the highest risk. The findings resonate even more as Disability Insurance Awareness Month comes to a close.

“Your biggest asset is your income. Your paycheck is worth more than your car and home so why not insure it?” Faisa Stafford, CEO and president of Life Happens, told Yahoo Money. “Disability insurance is insurance for your income if you’re sick or injured.”

The risk of disability is much more common than many Americans may think.

About 90% of disabilities are caused by illness, according to the Council for Disability Awareness, and more than a quarter of 20-year-olds will become disabled before retiring, according to the Social Security Administration.

“At 32 years old, I hit my head on the bottom of a lake in a water skiing accident,” John Nichols, president of Disability Resource Group, told Yahoo Money. “I woke up a quadriplegic and it took six years from the date of my accident to get back to work on a proactive, full-time basis — but still disabled.”

Disability insurance allows those injured or ill time to fully recover without the worry of how bills will get paid. Because bills don’t stop because of a disability. For instance, 40% of foreclosures are due to disability, according to Stafford.

Otherwise, many rely on savings, family, or retirement accounts to pay the bills while disabled. Family may or may not be able to help. Savings may not be enough if your disability goes beyond three months.

“Health insurance put me back together for basic daily activities, but it didn’t put me back together to perform work,” Nichols said. “It was disability insurance that gave me control over my recovery and funds to live in my own home and provide for myself instead of moving in with parents without the worry of paying bills.”

Disability insurance replaces a certain percentage of your income for a specific period if you can’t work because of an injury or illness. Coverage comes as short term or long term.

Although many employers offer short-term disability group coverage for full-time employees, it is good to supplement that coverage with long-term disability insurance because short-term typically lasts 13-26 weeks depending on your employer.

For some, that means returning to work not fully recovered because they need a paycheck. That’s where long-term disability insurance helps, but two-thirds of private-sector workers don’t have that coverage, according to the SSA. And Social Security is typically not enough by itself.

“Social Security Disability Insurance (SSDI) is modest, just above poverty level and difficult to get,” Stafford said. “Not having a backup can destroy a family.”

If you are a gig worker or a part-time worker ineligible for short-term disability with your employer, you need to get individual disability coverage — similar to having an individual life insurance policy.

“It’s about feeling comfortable and financially secure,” Stafford asked. “If you don’t have disability insurance, where will the money come from to pay your bills?”

Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda.

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