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Do You Need Disability Insurance?

Cost can be high, but it can protect the peak earning years of those 50-plus

Attention, 50- to 55-year-olds (and anyone who cares about a 50- to 55-year-old) — this column is for you. You're probably thinking: Here comes the reminder that it's time to start thinking about long-term care insurance. Close, but wrong. This is the reminder that it's time to start thinking about disability insurance.
You have questions. I have answers. Here we go.

spinner image AARP Expert Jean Chatzky:Things You Should Know About Disability Insurance
Protect your peak earning years with disability insurance.
Illustration by Buena Vista Images/Getty Images

Q. Do I need it?
A. Think for a moment about what would happen if you were injured or ill and couldn't work. Would your savings plus any spousal income plus any payments you were able to get from Social Security Disability Income ($1,111 a month in 2012 on average) be enough to live on until Social Security and any other retirement benefits kick in? If not, you need it.

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Q. Why now?
A. We buy insurance to protect something. Homeowners insurance to protect our dwellings. Auto insurance to protect our cars. Disability insurance in your 50s protects what are likely your peak earning years. If you're thinking you need to work the next 10 to 15 years to shore up your retirement, protecting that earnings stream — just in case — is particularly important.

Also, notes Mark Maurer, president of Low Load Insurance Services, your window is closing. Most insurers won't offer individual disability past age 59 or 60. "If you're going to get it," he says, "you have to get it now."

Most policies will carry you through to age 65 or your full retirement age. If at that point you're still working more than 30 hours a week, it may be possible to extend your policy for another year or two.

Q. If I'm not in perfect health, what should I expect?
A. As you age, it becomes more difficult (not to mention more expensive) to obtain disability, but it's underwritten in much the same way as other types of insurance, explains Matthew Herz of Herz Financial. "The severity of your medical issues will impact whether you get a policy at all or whether there are exclusions on your policy." So if, for example, you have a back problem — one that you regularly seek treatment for — your insurer may be willing to cover you, but not for claims involving your back.

Q. What's the best way to buy it?
A. Start at work. If your employer offers a group policy, chances are you can get insured without going through medical underwriting. This is very likely going to be your most cost-effective solution.

It may not provide as much insurance as you want — in general you should aim to cover 60 to 70 percent of your salary — but it's a start. Your employer may offer additional supplementary coverage, typically 15 percent cheaper than if you purchased it on the commercial market.

If you're going there on your own, you should know that unlike the life insurance marketplace, which has literally hundreds of providers, many of them well rated, there are only a handful of disability companies that offer noncancellable (by them), guaranteed renewable (by you) contracts.

This, says Herz, is the most important consideration. You only want a policy in which the terms and cost can't be changed in the years ahead.

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To find an agent, try the search tool at the website of the National Association of Health Underwriters.

Q. How much is it likely to cost?
A. Suppose you're a nonsmoking 50-year-old male in a white-collar, office-based job. A policy with a $3,600 monthly benefit that will start paying out after a 90-day waiting period will have a premium of about $3,400 a year, says Portland, Maine, insurance broker Matthew Tassey, past chair of the LIFE Foundation, a nonprofit that helps consumers make insurance decisions.

A 50-year-old nonsmoking female in the same sort of occupation would pay $4,125 for the same policy. Both policies would be for people making up to $100,000.

Why are women charged more? They're about 30-35 percent more likely to become disabled, says Tassey.

Q. Ouch. That's too much!
A. Technically, that's not a question. No matter. There are things you can do to lessen the sting. For instance, you can increase the waiting period from 90 days to 180 days (think of it as increasing the deductible on your homeowners' policy; you absorb more of the risk so the price drops).

Or, two or more people can get together and buy simultaneously to receive a lower rate. Herz explains that they don't need to be the same age or choose the same benefits; they are simply buying at the same time. Two people together might get 10 percent, five people 15 percent.

And, for women, there's a benefit to buying together with men. They can qualify for unisex rates, says Herz, a discount of 30-45 percent because of the men's lower risk factor.

Another thing to consider is a smaller or shorter term policy than you originally wanted. "Look at it like buying a house," Herz suggests. "If you want to buy a $1 million house but you can't afford it, you don't not buy a house. You buy a house that costs less."

Q. Is the process simple?
A. Ummm, no. Maurer tells people that disability insurance is probably the most invasive type there is. Underwriters look at your health, job, occupation and your finances. They often want to see tax returns. I've been through it myself and I can tell you, he's right. But that doesn't mean you shouldn't do it.

Q. When can I drop coverage?
A. There's a tipping point. Once you're retired and are no longer counting on earned income to live on and supplement your nest egg, you're done with disability insurance.

At that point, though, the need for long-term care insurance — which protects you from spending that nest egg too fast — takes over. There is, experts note, some overlap. You'll want to look into a long-term care policy by the time you're 55 or 60. After that, buying it becomes prohibitively expensive. But that's another column for another day.

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