Why do you assume people file for bankruptcy? For help after a string of poor financial choices? To get out of accrued debt? To wipe the slate clean after investments gone wrong? While all of these possibilities are valid, having a disability is actually one of the leading causes of bankruptcy.
That's right—in addition to the emotional and physical toll a disability can take, it can also lead to significant financial problems. A 2019 study points to a
How can disability lead to bankruptcy?
Disability is a broadly used term, but in the context of the
Take a look at these numbers:
- Most employer-sponsored disability insurance plans only
cover 40%–60% of your salary.
- In February 2021, the average Social Security Disability Insurance (SSDI) benefit for a disabled worker was
only $1,279 a month.
- Only 40% of U.S. households
have enough cash savingsto cover three months of living expenses. Just 28% are able to cover at least six months of expenses.
- Workers' compensation only provides coverage for time away from work if the illness or injury was directly related to work. However,
less than 1% of occupational-injury casesinvolve missing days of work because of a work-related illness or injury.
It's easy to see how a person could tumble into significant debt—and eventual bankruptcy—if a reduction in income lasts a long time. This is why it's important to consider disability insurance coverage as part of your personal financial strategy.
What is disability insurance?
Despite it being available, though, at least
Who should get disability insurance?
In short, it's something
Disabling injuries and illnesses can happen to anyone at any time, even if you're healthy enough to run a marathon the day after Thanksgiving. In fact, the Social Security Administration says that 25% of today's 20-year-olds
Ideal features of a disability insurance policy
If you choose to purchase your own
Financial services organizations usually have several plans with different protection options. Here's a rundown of common policy features to help you make sure the plan you choose has what you need:
- Noncancelable. The insurance company can't terminate your policy except in cases where you don't pay your premium. This feature allows you to renew without an increase in your monthly premium or a reduction in your benefits.
- Guaranteed renewable. You have the right to renew the policy with the same benefits without cancellation. However, the insurance company may increase your premiums, but only if it does so for all policyholders in the same rating class as you.
- Coordination of benefits. The benefit amount you receive from the insurance company may depend on the coverage you have from the other resources mentioned. For example, a policy may specify a maximum amount you can collect from all your policies combined.
- Additional purchase options. You can buy more disability coverage at a later time.
- Cost of living adjustment. Your disability benefits may increase based on an increased cost of living as measured by the Consumer Price Index. Note that this may also involve you paying a higher premium.
- Return of premium. The company may refund part of your payments if you didn't make any claims for a specified period of time.
- Waiver of premium. You don't pay premiums on the policy after you've been disabled for a certain number of days.
- Residual or partial disability. If you're still partially disabled but return to work part-time, this rider option could allow you to continue to collect a portion of your policy benefit.
Depending on the features you select, your premium could go up, so you'll want to weigh the costs and benefits for your unique situation. To get expert help incorporating the monthly premiums of disability insurance into your larger financial strategy, contact a
The bottom line
No one plans on becoming disabled, and no one wants to enter bankruptcy. But with the right disability insurance coverage, bankruptcy and disability don't have to be two sides of the same coin.