Is Disability Insurance Still Worth It? Factors to Consider Before Cancelling

If you can financially take care of yourself and your family for an extended period without income, you may be wondering whether you need to continue paying for disability insurance.

First, a brief review of disability insurance:

• Purpose: This type of insurance is typically purchased to replace your income in the event of a disability.
• Short-term vs. Long-term: Short-term coverage usually pays about 60% of your income for three to six months, so it’s good for pregnancy and non-critical health conditions that have remedies. Long-term coverage will replace around 60% of income for five to ten years or more, which is useful for when you experience a recurring or more debilitating condition.
• Cost: Individual disability insurance generally costs between 1% to 3% of your annual salary.¹ For example, if your annual salary is $200,000, your monthly rate could be anywhere from $167 to $500 per month, depending on your personal circumstances. Other factors that affect cost include health, lifestyle, occupation, and gender.  Women pay more than men for disability insurance, typically 40% or more, because they file more claims during their lifetime than men.²

Determining your disability insurance need comes down to your assets and income sources. Do you have enough between savings and investments to provide a monthly income replacement if you can no longer work? Would there be any tax implications to withdrawing from these assets, for example, withdrawing from a 401(k) prior to age 59 ½. Do you have any other income sources such as real estate income or a pension you could activate early? After taking everything into account, is this enough to support yourself as well as others who depend on you?

Keep in mind that the average long-term disability insurance claim lasts for 34.6 months, so you’ll want to be confident that you can cover expenses for at least that long.³ And the waiting period for benefits to start after submitting a claim can be 90 days or more.

Source: What is long-term disability insurance and how does it work? (usatoday.com)

Here are some other considerations:

• Age: Disability insurance benefits typically end at age 65. If you’re close to retirement, and have sufficient retirement savings, you might forego disability insurance. But keep in mind that around 28.4% of the U.S. population between ages 45 and 64 has a disability.⁴
• Employment status: If you’re in your fifties and still working, disability insurance may be worth having if you’re still financially supporting family members. Take advantage of a group policy through your employer, if it’s available, because it’s around 15% less than an individual policy and has easier eligibility.⁵
• Health status: If you have pre-existing health conditions or your health is deteriorating, disability insurance is crucial for replacing income. Plus, if you don’t already have it, getting disability coverage is challenging once you have a disabling condition. Musculoskeletal disorders, including arthritis, osteoporosis and gout, account for most long-term disability insurance claims.⁴
• Occupation: If you own a small business and are involved in the day-to-day, it could be reasonable to have disability insurance to ensure the business doesn’t struggle while you are disabled. Like your health situation, if you are working in a physically demanding job or one with higher risks of injury, disability insurance could make more sense due to the higher probability of risk.
• Lifestyle: If you spend a lot of money on a lifestyle that can’t be sustained without your income, having disability insurance could allow you to feel more comfortable. On the other hand, if you regularly participate in behaviors considered risky by insurance companies, such as smoking or skydiving, you may not be eligible.
• Social Security Disability Insurance (SSDI): Depending on your work history, you may be eligible for SSDI benefits if you become disabled. However, SSDI benefits might not be enough to cover all your expenses, so supplemental disability insurance is beneficial, if you need it. Be prepared for the five-month waiting period for SSDI benefits.

Consult with your wealth advisor who can help you evaluate your complete financial plan and determine if disability insurance is necessary for you to keep at this stage of your life.

If you’re not a Mercer Advisors client and want to know more about whether you can afford to cancel your disability insurance, let’s talk.

1.“How much does long-term disability insurance cost?”, Policygenius, April 1, 2024.

2.“The cost of long term disability insurance,” Breeze, Feb. 15, 2022.

3.org, The Council for Disability Awareness.

4.Disability and Health Data System, CDC, 2021.

5.“Do You Need Disability Insurance?“, AARP, Aug. 23, 2012.