The Risk You Can’t Diversify Away – Disability

Americans are very familiar with insurance. We insure our cars, our homes, our lives, and are increasingly insuring our pets. Despite this familiarity, disability insurance remains one of the most misunderstood and underutilized forms of insurance available today.

The Case for Disability Insurance

A 2025 survey conducted by Navigator Research found that 57% of American adults say they are living paycheck to paycheck. Amongst Millennial and Gen Z respondents, that percentage is even higher. The underlying message is clear- more and more strain is being placed on peoples’ incomes. Given this, the need to protect that income has never been more prevalent.

Disability insurance serves as a way to replace that income during periods in which you are unable to work due to an injury or illness. With lost income can come missed bills, lost retirement contributions, and depletion of existing assets. Disability insurance can help to avoid these common pitfalls. Having a proper plan and protection in place for instances of extended income loss can significantly reduce the mental and financial strain and ensure that short period of disability doesn’t derail the years of work and saving you have done.

Understanding Your Policy

Policygenius conducted a study in 2024 that found that over half of respondents were unable to accurately describe disability insurance. While having coverage is great, it is crucial that you have a proper understanding of your policy and how it works.

For instance, there are two types of disability insurance: short-term and long-term. Short-term disability typically provides benefits for a period of months. Long-term policies are usually stated in years. Properly pairing a short-term policy with a long-term policy can ensure you are fully protected.

Every policy has an elimination period and a benefit period. The elimination period is the amount of time that must elapse before claiming benefits. The benefit period is the amount of time you can receive benefits. A fully funded emergency fund can be leveraged to make ends meet during your elimination period.

Believe it or not, there are different definitions of disability. Each policy has a specific definition that it uses to determine whether you meet the criteria to receive benefits. The two definitions of disability are any-occupation and own-occupation.

Any-occupation disability considers you disabled if your ailment prevents you from being able to perform the duties of any job that you’re suited for. While a policy with the any-occupation definition might be cheaper, it comes with a higher threshold to satisfy in order to receive benefits.

Own-occupation disability states that you are disabled if you are unable to perform the duties of your specific job. If you are in a highly specialized field (looking at you, surgeons), consider a policy with the own-occupation definition to ensure your income level can be maintained through a disability.

The last thing to understand is the tax implication of receiving benefits. This depends on who is paying for premiums. If some other individual is paying the premiums, such as in an employer provided arrangement, you will owe income taxes on any benefits received. If you personally own the policy and have paid premiums yourself, benefits will be received tax-free.

Avoid the White-Collar Bias

The most common response I receive when discussing disability insurance is some form of “I work behind a desk; I don’t need disability insurance because my job isn’t strenuous.” This common and understandable pitfall can have drastic consequences on your long-term financial security if acted upon.

In reality, past studies have found that injuries suffered in the workplace account for roughly 9% of disability insurance claims. While it is natural to think of accidents that may occur in your workplace, remember that an illness such as cancer could render someone too ill to work and thus qualifies them as disabled.

Summary

In conclusion, the need to insure against loss of income has never been more relevant. More and more pressure is being placed on week-to-week cash flow to support long-term financial plans. Consider your need for additional disability protection to ensure that the only thing you are worrying about during a period of disability is healing.

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