Last time I went over the importance of an emergency fund. This was to cover between 3 and 6 months of expenses. This time, I am going to go over disability insurance. This insurance covers you in case you become disabled by either accident or illness. There are 2 types of disability insurance, long term and short term. Both of them pay a percentage of your income for a period of time.
Short term disability insurance, as the name implies, covers you for a short period of time. It will usually kick in 2 weeks after you are unable to work and lasts between 3 and 6 months. This type of insurance will make it possible to survive the first few months of a terrible illness or injury. Of course, if you have a fully funded emergency fund, it would not make sense to pay the premiums. Your emergency fund can pay the bills for 3 to 6 months.
Long term disability insurance picks up where short term disability insurance leaves off. It usually kicks in 90-180 days after your last day of work. There are several plans available that will cover you for 2 to 10 years, and some that will cover you until the age of 65. I highly recommend getting coverage until 65 if you can afford it.
One note about long term disability insurance: if you have a 90 day waiting period, then on day 91 they will start counting the first month that they will pay for. That means that there is another 30 days before you actually get a check. This can mean that you have a 30 day period without coverage.
If you remember, I went over my situation and how our emergency fund helped. We had 2 months saved up and our first long term disability check arrived after 4 months. We had a gap of 2 months where we had to rely on our friends and family. If I had it to do over, I would have had short term disability insurance until we had a 6 month emergency fund saved up.
Disability insurance will provide an income should you become disabled by illness or injury. If you have a fully funded emergency fund that can cover the waiting period for long term disability insurance, you can skip the short term. Otherwise, having both would be ideal.