Life Insurance vs. Disability Insurance: What’s the Difference?
Written by
Peter Burns
Edited by
Levi Leidy
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There are many different types of insurance you can buy to protect your loved ones. Two of the most common coverages are disability and life insurance. Knowing the differences between these types of insurance can help you prepare for unexpected events that may affect you and your family’s finances.
What Is Life Insurance?
Life insurance is a way to protect your family financially if you pass away unexpectedly. When you become a life insurance policyholder, you pay regular monthly premiums to your provider. In return, when you pass away, the provider gives your beneficiaries a death benefit, which is a lump sum of money. Your beneficiaries can use these funds to support themselves in your absence and pay for expenses ranging from tuition to lost wages to funeral expenses.
What Is Disability Insurance?
Disability insurance protects you when you can no longer work because of an illness or injury. This coverage requires you to pay disability insurance premiums at regular intervals. If you cannot work, your provider will cover a percentage of your income. Providers and policies will have differing definitions of a disability and what qualifies for benefits. Disability insurance includes short-term disability, which covers part of your earnings for a few months while you recover, and long-term disability, which covers part of your income for years.
The Differences Between Life and Disability Insurance
Life and disability insurance are both ways to protect your family from financial hardships. Understanding the differences will help you determine which type of coverage fits your needs. Some important differences between the two include:
- Purpose: Life insurance supports beneficiaries after a policyholder’s death, while disability insurance supports the policyholder and their loved ones when they cannot work.
- Triggering event: Life insurance providers give a payout to family members when the policyholder passes away, while disability insurance providers pay policyholders when they are unable to work and earn an income.
- Payout:Â Life insurance beneficiaries receive a lump sum, while disability insurance policyholders receive multiple monthly payments over time.Â
- Subjectivity: Providers and policies differ on the definition of a disability, making it subjective and open to interpretation, while the triggering event for a life insurance policy is more clear-cut.
- Taxes: When a beneficiary receives a life insurance payout, they don’t need to pay taxes, while disability insurance payouts depend on what the policyholder uses to pay their premiums. Paying with post-tax dollars will result in a tax-free payout, while paying with pre-tax dollars means the policyholder must pay taxes upon receiving the funds.
Why Buy Life or Disability Insurance?
When planning for your future, insurance helps you secure your finances. Taking out an insurance policy helps protect you against unexpected events that can easily derail your finances. Just like auto insurance provides aid when you have a car crash and health insurance helps with medical emergencies, taking out life or disability insurance will likewise provide benefits when necessary.
You may want to take out life insurance for a variety of reasons. If you are the breadwinner of your family, a life insurance policy guarantees that your dependents will have financial security that can cover mortgage payments, education expenses and cost-of-living expenses. Life insurance also covers end-of-life expenses like funerals. In 2023, the National Funeral Directors Association reported that the median cost of an adult’s funeral with a viewing and burial was $8,300. Without life insurance, that expense could throw a family struggling to come up with a long-term financial plan into unwanted debt.
Disability insurance protects you and your whole family when an unexpected event prevents you from working. The Council for Disability Awareness reports that 1 in 4 of today’s 20-year-olds will develop a disability before they retire. Buying disability insurance protects you and your loved ones from a freak accident that keeps you from earning an income for months or years.
How To Make a Decision
It’s always a good idea to speak directly and openly with your family members about these types of decisions. Purchasing insurance can be costly, but the security it provides is worth it for many. Consider the current state of your finances and how unexpected occurrences would affect you and those around you. Look into the different insurance packages available and see which would suit your circumstances.
There are situations where you may not need disability or life insurance. For example, if you don’t have any dependents and you have a considerable amount of wealth, insurance may not provide much of a benefit. However, for most people, investing in disability or life insurance provides a blanket of financial protection for the long term.
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