Life insurance vs. disability insurance: Why you should consider having both
How does life insurance differ from disability insurance, what are the benefits of each, and why might you need both?
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What do you think of when you hear the word "insurance?" For many people, the first thing that comes to mind is health insurance, which is intended to pay the bulk of your medical bills and protect your finances should you get seriously ill. The next thing that people often think of is life insurance, which can provide vital financial protection for your dependents in the event of your death.
But there's also a type coverage that may not be top of mind — but should be. Disability insurance – sometimes referred to as disability income insurance — helps protect your family finances by paying benefits when illness or injury keeps you from working. Disability is more common than you might think: The Social Security Administration (SSA) estimates that one in four 20-year-olds will experience a disability for 90 days or more before they reach age 67.1
The bottom line? You may not need one or the other — because you probably should have both. So take a few minutes to learn more about:
Why people should consider life insurance
Why people should consider disability insurance
The differences between life and disability coverage
How to get life and disability coverage
What is life insurance, and why should you consider having it?
The key purpose of life insurance is to help provide financial protection to your dependents if you unexpectedly pass away and can no longer provide for them. However, a life insurance policy can serve other purposes as well. That’s why financial professionals often recommend it for:
People with dependents: Life insurance is crucial if you have children, family members or other dependents who rely on your income. Term life insurance, in particular, can be a cost-effective way to protect their financial well-being in the event of your death. The death benefit – typically paid as an income tax-free lump sum - can be large enough to replace years of income you would otherwise provide, covering everything from daily living costs to college tuition.
Those seeking tax-efficient savings: Permanent whole and universal life insurance can build cash value over time, which can be used as a tax-efficient way to help you achieve your financial goals.2 Cash value can be accessed in a variety of ways to use during your lifetime for things like college tuition, health emergencies, retirement and more.3
Those with debts or financial obligations: If you have significant financial obligations, such as a mortgage, life insurance can help ensure that your survivors are not burdened with those obligations.
There are two main types of life insurance policies
Term life insurance provides coverage for a specified period, usually ranging from 10 to 30 years. It offers a straightforward and relatively affordable way to protect your loved ones' financial well-being, but coverage is temporary – once the term ends, the protection ends.
A term life insurance policy is most appropriate for those who want protection for a specific period of time. For instance, parents of young children may purchase a 20-year term life to protect family finances until the children are old enough to support themselves. And because term policies are generally less expensive than permanent policies, a large benefit can be more affordable.
Get an estimate of how much coverage you need and a fast - term life insurance quote.
Permanent life insurance – whole life insurance or universal life insurance — costs more than term but provides coverage that lasts your entire life.4 With a permanent policy, your beneficiaries will collect a death benefit regardless of when you pass away, even if you live past age 100. These policies also offer a cash value component: a portion of your premium can grow tax-deferred over time, and you can access the accumulated cash value while still alive.
Permanent life insurance is most appropriate for those who need coverage that stays in force indefinitely, with the added benefit that it offers a tax-efficient way to accumulate family assets. Many use permanent policies to supplement other savings, investments, and retirement savings vehicles.
Connect with a local financial professional to get a quote.
What is disability insurance, and why do you need it?
Think about what would happen to your family finances if you couldn't earn income for an extended period due to illness or injury. The fact is, virtually everyone is at some risk of a disability that will compromise their ability to work and threaten their income. And while many people think they'll be covered by workers compensation insurance, the fact is most long-term absences are caused by back injuries, cancer, heart disease and other illnesses,5 as opposed to job-related accidents. But a disability insurance policy helps replace a portion of lost income should you be unable to work due to any covered illness or injury – not just accidents on the job. However, not all policies cover all types of disabilities, and both the duration and the benefits vary from policy to policy.
Short-term disability insurance
Also called STD, this coverage is for temporary disabilities lasting a few weeks or months. Employers often provide STD plans as a group benefit to all employees, and many states mandate some form of coverage. A wide variety of injuries or medical conditions are covered as long as they render you physically unable to do your job, although some issues, such as mental illness or pregnancy, may not be covered depending on the plan.
All disability plans have a "waiting period" until they start paying benefits, but with STD it's relatively brief – two weeks is typical. The benefits aren't designed to replace all your wages, but the payment usually equals about 60%-80% of your income. The "benefit period" (i.e., the maximum amount of time you can receive payments) usually lasts 3-6 months or until you can return to work.
Social Security Disability Insurance
Also called SSDI, this coverage is included in your Social Security benefits, and a portion of your Social Security taxes pays for the premiums.6 However, you may not want to rely on SSDI alone for disability protection.
For one, you need to have earned a sufficient number of Social Security work credits before qualifying for benefits, and SSDI only pays for extended or permanent disabilities that make you incapable of doing any work of any kind. There’s a five-month waiting period before you can start receiving benefits, so it doesn't provide protection for shorter-term disabilities. Finally, the average SSDI benefit is only $1,537 per month (2022 figures),7 which may not provide the income protection you need.
Long-term disability insurance
Also called LTD, this covers long-lasting disabilities like SSDI (see below), but with a private LTD policy, it may be easier to qualify for benefits, and the benefit amount may be more generous.
You can expect to pay anywhere from 1% to 3% of your annual income for a comprehensive long term disability policy, but most policies offer generous benefits which will replace between 60%-80% of your income. The waiting period is typically longer than for STD (3-6 months is common), and the benefit period can last much longer. Many policies will continue paying through retirement age unless you recover from your disability beforehand. The shorter the waiting period and the longer the benefit period, the more expensive the policy.
Get a long term disability insurance quote
Consider the differences – and what’s right for you
Life insurance and disability insurance can both provide important financial protection for your family, but they do so in very different ways. Life insurance pays a one-time benefit in the event of your death, and disability insurance pays a monthly benefit if you cannot work. The question is, do you need one of these forms of income replacement, both, or neither?
Every person’s situation is unique. For life insurance, the decision often comes down to whether or not they have financial dependents. For those considering disability insurance, it’s often a question of whether they have enough assets to maintain their lifestyle if they can’t work. In other words:
If you have substantial assets and no dependents, you may not need either form of protection.
If you don't have dependents to worry about but also don't have enough assets to live on, you may want to start with disability.
Conversely, if you have dependents and at least some assets (or a working partner or spouse) to help tide you over if a disability keeps you from working, you may want to start with life insurance.
Finally, if you have dependents and don't have enough assets to maintain your family's lifestyle if you can't work, you probably need both.
A lot of us fall into the last category. If you've decided you need both life insurance and disability insurance, you don't have to put either one off. In fact, there are good reasons to apply for both policies at the same time. Rates for both go up with age, so coverage will likely never be easier to get. The application processes are similar, and you may be able to use the same medical exam for both. Also, if you're not sure you can afford a separate disability policy, some life insurance companies allow you to add a disability rider to your life insurance policy. This will increase your premium but may still save you a significant amount compared to purchasing a separate disability policy.
Life insurance vs. disability insurance: An overview
Term Life Insurance | Permanent Life Insurance | Short-Term Disability | Long-Term Disability | |
|---|---|---|---|---|
Cost | Relatively affordable. Cost varies based on coverage amount, applicant age and health, and term length. | Relatively more expensive. Cost varies by coverage amount, applicant age and health, type of coverage (whole or universal), and policy riders and features.8 | Typically offered as an employee benefit. Difficult to purchase as an individual. | A typical policy may cost between 1-3% of annual income, depending on benefit level, benefit period, policy features. |
Benefits | Death benefit paid to beneficiaries if policyholder dies during the term. | Death benefit paid to beneficiaries no matter how long policyholder lives. Also builds tax-efficient cash value that can be accessed in various ways. | Typically 60-80% of income per month if policyholder unable to work due to illness or injury. | Typically 60-80% of income per month if policyholder unable to work due to illness or injury. |
Benefit Period | Coverage lasts for the length of the term – usually 10, 20 or 30 years. | Coverage lasts until the policyholder’s death – at any age. | Benefits are typically paid for 3-6 months, or until recovery (whichever is sooner). Maximum period is one year. | Benefits can be paid for a set number of years (e.g., 2, 5, or 10), or until retirement age or for life, depending on the policy. |
Advantages | Typically the most affordable way to get significant life insurance coverage. | Lifetime coverage. Also features as a tax-efficient cash value component. | Often offered by employers. Generous monthly benefit. | Generous monthly benefits that can last for many years. |
Drawbacks | Coverage ends when the term is over. May be difficult to renew policy. | More expensive than term coverage. | Benefit period typically limited to 3-6 months. | May cost 1-3% of annual income. |
Why people choose Guardian for life insurance and disability coverage
Guardian Life Insurance issued its first life insurance policy in 1860, and has been a trusted resource to generations of families. And, Investopedia named Guardian the Best Overall Disability Insurance Company for 2023 because of our wide range of policies and options to meet the needs of individuals and businesses.9 With high scores for financial soundness from independent rating agencies, our 12 million customers can trust us to be there when they need us most.10
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Frequently asked questions about life and disability insurance
This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.
1 https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
2 Some polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.
3 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
4 All life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
5 The chances of becoming disabled are rapidly increasing; disability statistic (disabilitycanhappen.org)
6 The Social Security Administration has not approved, endorsed, or authorized this material. Contact the Social Security Administration for complete details regarding eligibility for benefits.
7 How Are SSDI Payments Calculated in 2023? | Atticus
8 Riders may incur an additional cost or premium. Riders may not be available in all states.
9 https://www.investopedia.com/best-disability-insurance-5071119
10 https://www.guardianlife.com/financial-highlights Financial information concerning Guardian as of December 31, 2022, on a statutory basis: Admitted assets = $76.0 billion; liabilities = $67.2 billion (including $55.0 billion of reserves); and surplus = $8.8 billion.
Financial information concerning GIAC as of December 31, 2024, on a statutory basis: Admitted Assets = $10.6 Billion; Liabilities = $10.0 Billion (including $3.5 Billion of Reserves); and Capital and Surplus = $0.6 Billion.
11 Life Insurance and Disability Insurance: Do You Need Both? (2023) (marketwatch.com)