What is disability insurance, and do you need it?

Disability insurance replaces a portion of your income, typically around sixty percent, if you cannot work due to illness or injury. For working-age adults it protects the asset that funds everything else, which is your earning capacity, and the probability of a disabling event during a career is considerably higher than the probability of dying during it. Social Security Disability Insurance exists as a backstop but has a strict definition, a lengthy application process with high initial denial rates, and modest benefits, so treating it as your plan is a weak position.

The single most important policy term is the definition of disability. Own-occupation coverage pays if you cannot perform the duties of your specific profession, which is what a surgeon with a hand injury needs. Any-occupation coverage pays only if you cannot perform any work you are reasonably suited for by education and experience, which is a far higher bar and much cheaper. Modified or transitional definitions sit in between, often own-occupation for an initial period then any-occupation afterward. Reading which one you have is the difference between a policy that pays and one that does not.

Other terms that determine value: the elimination period, meaning how long you wait before benefits begin, commonly 90 days, which needs to align with your emergency savings; the benefit period, whether payments continue to age 65 or stop after two or five years; whether the policy is non-cancelable and guaranteed renewable, locking in premiums and terms; and whether a cost-of-living rider is included, since a fixed benefit erodes over a long claim. One tax point with real consequences: benefits from a policy you paid for with after-tax dollars are generally tax-free, while benefits from employer-paid coverage are generally taxable, which means a sixty percent employer benefit nets substantially less than sixty percent.