The Insurance Advice Every Millennial Needs To Hear

This post is written for the LinkedIn series #IfIWere22, in which users are encouraged to share advice for young adults and recent graduates.

I bought disability insurance shortly after I graduated law school. Although my disability law career was just beginning, one thing was already clear: income protection was not something to forgo.

Today’s young adults face a different reality. Many are not educated about insurance before entering the workforce, and with the financial obstacles that lay ahead, most can’t – or, they are confused when they try to learn.

In honor of Disability Insurance Awareness Month, here is what every young adult needs to know about disability insurance.

The financial reality for millennials

It’s estimated that only 13 percent of millennials have disability insurance. Given the financial hurdles most millennials face, it’s not surprising:

According to the Pew Research Center, millennials are the first in the modern era to have higher levels of student loan debt, poverty and unemployment, and lower levels of wealth and personal income than Generation X and baby boomers had at the same stage of their life cycles. These circumstances create quite the paradox. Since many young adults live paycheck to paycheck, disability insurance seems like an unnecessary expense. However, this perfect storm of financial instability is precisely why millennials must figure out how to afford some form of disability income protection.

The millennial risk of disability

Young adults don’t forgo disability insurance because they feel invincible, but their overall healthiness may dissuade them. However, more than one in four of today’s twenty-year-olds will experience some sort of disabling illness or injury in their working lifetime. The common causes of disability may differ from a young adult’s perceptions, further deterring them from income protection. According to Council for Disability Awareness 2013 Long-Term Disability Claims Review, the following were the leading causes of new disability claims in 2012:

• Musculoskeletal/connective tissue disorders (28.5%) *
• Cancer (14.6%)
• Injuries and poisoning (10.6%)
• Mental disorders (8.9%)
• Cardiovascular/circulatory disorders (8.2%)

* This category includes claims caused by neck and back pain; joint, muscle and tendon disorders; foot, ankle and hand disorders, etc.

Long term disability insurance options

How much will disability insurance actually cost for young adults? The annual premium amounts to approximately 1 to 3% of their yearly income. The cost depends on the features, advantages and type of benefits he or she chooses.

Long term disability insurance can be acquired through a private insurance company or run through a company-sponsored plan, and these policies typically pay between 50 to 66 2/3% of one’s pre-disability earnings

Group disability insurance
Most Americans have a group long term disability insurance policy: one they got through their employer or through a professional organization/association they are part of.

Although group LTD policies have their drawbacks – for example, they have many more limitations than individual policies and the benefits are taxable – they are popular for a reason. Employer-sponsored plans are easier to qualify for, and employers may cover all or at least part of the premiums. For cash-strapped millennials, these policies are a valuable benefit that, if offered, should be taken. After all, some coverage is better than none at all.

Individual disability insurance
Millennials who work for start-ups or switch jobs frequently may not have access to employer-sponsored coverage, so an individual disability insurance policy is the best way to protect their income.

Individual disability insurance policies have other serious advantages for young adults – they have fewer limitations than group policies, and the benefits are received income tax-free. While they may require a medical exam upon application, this is less problematic in one’s twenties than later in life.

Why not rely on Social Security Disability?
When you say the words "disability insurance," most people immediately think of Social Security. It's what comes up in most online searches, and most people believe Social Security disability benefits will offer them sufficient coverage for their basic expenses. This isn’t true, and young adults who plan to rely solely on Social Security disability benefits should reconsider their options because:

Age also plays a significant role in who qualifies for SSDI benefits, and millennials are not at the top of the list.

The sparse – and often difficult to obtain – benefits themselves are another reason to reconsider; this Social Security Administration factsheet points out that the average monthly disability benefit is barely enough to keep a beneficiary above the 2014 poverty level.

For more information

If you or a young adult in your life would like to learn more about long term disability insurance options, check out our “Disability Insurance 101” podcast episode: