Disability Insurance:The Biggest Gap in the Financial Plans of Many Families
by Richard Halverson

This is a tough subject to write about.  On one hand, disability is a serious risk.  Frequently, the lack of disability insurance is the biggest gap in a family’s financial planning.  On the other hand, individually purchased disability insurance is quite expensive which discourages many people from buying it.

Here is the question.  What would happen if you were disabled and unable to work?  How long could your family survive financially?

A 30% CHANCE OF BECOMING DISABLED

Disability is risk and a larger risk than most of us thinks.  This quote is found on the Social Security web-site.

Disability is a subject you may read about in the newspaper, but not think of as something that might actually happen to you. But the chances of becoming disabled are probably greater than you realize. Studies show that a 20-year-old worker has a 3-in-10 chance of becoming disabled before reaching retirement age.  (Emphasis added)

BEING DISABLED IS 6 TIMES MORE LIKELY THAN THE POSSIBILITY OF DYING

According to the American Council of Life Insurers (ACLI), a person age 35 is six times more likely to become disabled than to die before he or she reaches age 65.

Most income earners understand the need for life insurance to protect their family if they should die.  But being disabled is more likely and can be worse than dying – at least economically.  I do not mean to be insensitive but when you die, at least you quit costing the family money.  If you are disabled you still need food and clothing and perhaps much more.  The costs associated with supporting you may actually rise, even though your income has disappeared.

FORTUNATELY MOST DISABILITIES ARE NOT PERMANENT

Fortunately, the reality of disability is not quite as stark as the above statistics suggest. Many of those who are disabled will return to work either at their original or some other occupation.  The number of permanent and total disabilities is far lower than 30%.  But the question remains – what would be the financial impact on your family if you were disabled and could not work for a year, or six months, or even a month?

Loss of income due to disability is an important risk that is worth insuring against.  Quite often people who do have disability insurance have it through a group plan at work.  If you are among those who enjoy this benefit, I encourage you to find out about the policy so that you can be sure you are satisfied with the coverage.

LEARN ABOUT DISABILITY INSURANCE

If you do not have disability insurance at work, I encourage you to look in to buying a policy on your own.  You can get a sense of the market on-line.  Before you begin your search, take a few minutes to acquaint yourself with some of the key terms and considerations listed below.  You may want to visit a few web sites that I have listed to help you be more informed with the terminology. Then do a search on “Disability Insurance”.  Any number of sites will be found that will give you a quote.  Typically, you need to fill in basic information and an agent will call you on the phone.  I wish I could give you some examples here so you could have an idea about cost.  Unfortunately, there are way too many variables to offer any kind of meaningful guidance in this article at all.

Here are some of the key considerations when evaluating a policy you may consider buying or in evaluating a policy you may have at work.  It is important and fairly easy to grasp the basic concepts of disability insurance.  When you understand the basic bafflegab, you can be a much more informed consumer.

·         Short term disability.  This refers to disabilities lasting a few months or less.  Short term disability insurance providing income during the first 1 to 6 months of a disability is very expensive.  Some employers provide it.  Few individuals purchase it on their own.

·         Long term disability.  How long must you be disabled before your insurance begins to pay benefits?  Three to six months is typical.  Shorter waiting periods cost more.

·         Disability.  What does the policy define as a disability?  Some policies require total disability meaning you are not able to work at any occupation.  Others provide benefits if you cannot work at your normal occupation.  Broader definitions of disability are superior but cost more.

·         Length of benefits.  How long will benefits be paid?  Some policies have a fixed period like 5 years.  Others will pay until you reach age 65.  Extended periods of payments are best but cost more.

·         Guaranteed renewable versus non-cancelable.  You want to be certain you can maintain the policy even if your circumstances change in the future.  Both these policies provide that.  With guaranteed renewable your future premiums may increase but only if your entire rate class increases.  With non-cancelable your future premiums will not increase which is good but, of course, that costs more to begin with.

·         Level of benefits.  Most policies will provide benefits as a percentage of your previous income.  Levels ranging from 50% to 66 2/3% of previous income are typical.  Generally, there is also a maximum dollar amount in addition to the percentage.  Obviously higher benefits are more desirable but they are more costly.

·         Proving your disability.  Most policies require a statement from your physician.  Some may require additional documentation.  Be careful of policies that seem to require excessive documentation.

·         Worker’s compensation offset.  Some policies may reduce benefits if you receive worker’s compensation benefits.  Once again, if you ever need the insurance higher pay outs are good, but they cost more to purchase.

There are a number of web sites that can increase your understanding of this subject.  I do not promote any of them.  Here are two that I found to have useful information and explanation of terms:

The Basics of Short Term Disability Insurance.

What Factors Should I Consider Before Buying Private Disability Insurance?

GET SOME QUOTES

There are numerous web sites you will find when you search where you can receive quotes on disability insurance.  One of the important reasons to acquaint yourself with the terminology and options before getting these quotes is so that you can make good comparisons and so you realize that a low price is not necessarily a good price.  It is possible to buy rather inexpensive disability insurance.  Unfortunately, the coverage is so limited it is unlikely to do you any good.  As you compare policies, you will also see how rapidly the cost does rise as desirable options are added.

I believe most people can learn enough about disability insurance that they can buy a policy on-line.  Others disagree.  Some planners feel disability insurance is sufficiently complex that the services of an agent or financial planner are required.  If after some study you feel uncomfortable proceeding on your own, then by all means seek the services of a qualified financial planner.  This will cost more.  However, as with everything else associated with disability insurance, the higher cost may be worth it.

TAXES

As you learn about disability insurance you will bump into a question of taxes.  In some cases you may have the option of paying your insurance premiums with pre-tax or after-tax dollars.  If you pay with pre-tax dollars you save money on taxes now but then you must pay income taxes on any benefit you may receive in the future.  If you pay with after-tax dollars then you will not be required to pay tax on any benefit you may receive.  This question is most likely to arise if you are buying insurance through your employment.

There is no perfect answer to the question.  However, I have these thoughts.  First, I nearly always believe it is wise to save taxes now rather than later.  Second, if you do become disabled and are collecting insurance you will almost certainly be in a lower tax bracket than you are now.  Finally, the odds are you will not become disabled.  On the other hand if you do collect benefits it is likely they will exceed all the premiums you have ever paid, meaning the taxes will apply to a large number.  Further, you can argue that paying taxes when you receive the benefit instead of when you pay the premium is partially defeating the purpose of having insurance.  I told you there was no perfect answer.

OTHER SAFETY NETS

It can be easy to wonder if disability insurance is even necessary.  Here are some thoughts along these lines that have been expressed to me over the years.

·         The only place I am likely to be hurt is at work.  If that happens, I will be covered by worker’s compensation.  It is not accurate to believe the only place you may be injured is at work.  The majority of disabilities are not work related.

·         Social Security will cover me.  Social Security does provide disability insurance.  However, qualifying is difficult, complex and the benefit is very minimal.  Don’t count on this to cover your disability needs anymore than you would count on social security to cover your retirement needs.

There are other public programs, charities and even Church funds that assist people who have become totally disabled.  However, you would not view these as a safety net anymore than you would view a homeless shelter as a safety net.  It is best to plan to take care of yourself before you discover that the safety nets out there can’t catch you before you hit the floor.

BUY ONLY WHAT YOU NEED TO COVER THE RISK YOU CANNOT AFFORD TO TAKE

If you have never looked into disability insurance before, I suspect you will be surprised how expensive it is, especially if you seek to buy an individual policy.  If you have some coverage at work but feel it is inadequate, see if you can increase it.  Many employers have programs that allow such flexibility.  If you belong to a trade or professional association, check with them.  Many of them have group insurance programs where you can buy coverage at lower cost than purchasing it individually.

Then, as with all insurance, buy only what you need to cover the risk you cannot assume on your own.  Do not try to maintain your existing life style with insurance benefits.  The vast majority of us can actually live quite well on less money if we absolutely must.  And again, as with any dollar you pay for any insurance premium, count yourself fortunate if you never have reason to collect on it.  It is a good thing when your insurance premiums seem wasted.  It means nothing bad has happened to you.  Spending money for disability insurance that you never need to use is a great blessing. It is wonderful – and most likely – that you will go through life without ever being disabled.