Death isn’t the worst financial thing that can happen to us. There ARE fates far worse. What I’m thinking of is a prime cause of home foreclosures, yet it isn’t the “credit crisis.” It is a very common occurrence across almost all age groups. It has the potential to completely wipe out all of your savings, yet it isn’t inflation or taxes. At age 42, a man is 4 times MORE likely to encounter it than death. About 30 percent of all people between the ages of 35 and 65 will experience this potentially devastating event in their lives. What is it?
Disability: The Ignored Risk
Most people are more than willing to buy some life insurance – just in case. But young people especially need disability insurance. Why? In your younger years, you’re earning income, and losing that income to a disability event could have a devastating financial impact. In fact, disability is more likely to occur during your younger, income earning years than when you’re in your 50’s. A 30 year old is more than TWICE as likely to become disabled than to die!
Here are a few tidbits related to disability:
1. Someone 35 years old has a 50 percent chance of disability for 90 days or more before turning 65.
2. Most people in the U.S. are better prepared financially in case of death (via life insurance) than for a disability, but the chances are at least three to five times greater (depending on age) that a disability will occur.
3. Approximately 375,000 Americans become totally disabled every year.
4. About one out of seven people who are between the ages 35–65 can expect to become disabled for five years or longer.
5. Almost 30 percent of the people who are between the ages 35 and 65 will experience a disability that lasts at least 90 days during their working careers.
6. About 110 million Americans have NO long term disability insurance.
7. About 8 million adults have some type of disability that limits or prevents them from working.
8. About 46 percent of all foreclosures on conventional mortgages are brought about by a disability, while approximately 2 percent are caused by the death of the homeowner.
9. Benefits from an employer plan are usually taxable but individual policies, purchased as an individual with after tax dollars, usually pay benefits income tax free.
10. Most people, no matter their income, spend 65 percent to 75 percent of their cash flow (some 100%). Aim toward securing as much disability income insurance as possible toward the goal of replacing that income.
11. If you put away 10 percent of your income each year, then one year of being totally disabled could wipe out the 10 years of principal that you put into your savings.
12. How good is social security disability income (SSDI)? Anyone at any income level can apply for Social Security Disability Insurance but one requirement is that you have to have worked at least 10 years before becoming disabled.
13. The Social Security disability Insurance program pays $722 per month on average. The requirements to receive disability benefits are so strict that only about 35 percent of the individuals that apply for benefits actually qualify and wind up receiving benefits.
14. The most common chronic conditions listed for limitation on working are back disorders (21 percent), followed by heart disease and arthritis. Injuries account for only 14 percent of disability claims.
Disability insurance is designed to replace a portion of your income if you become temporarily or permanently disabled by illness or injury. But remember that disability insurance isn’t only for people in high-risk jobs, such as Alaskan king crab fishermen or aircraft test pilots. Everyone who depends on income from work to pay their daily expenses should have disability insurance. If others, such as children, your spouse, your elderly parents, or other family members depend on your income, it is vital.
Choosing a Disability Policy
Your answers to the following six questions will help you and your insurance agent decide which disability insurance policy suits you best:
- How much do I need?
- What time period do I want to cover?
- Should I get residual coverage?
- Can I renew the policy easily?
- What are my future purchase options?
- How are cost of living adjustments handled?
How Much Do I Need?
The amount of coverage you receive usually depends on the extent of your disability. For example, some policies require the policyholder to prove total disability in order to receive any amount of coverage. Other policies pay out a partial amount based on the extent of the policyholder’s disability. In general, you will be able to insure up to (but no more than) 60 percent of your gross monthly earned income. This limit was established by insurers to maintain a cost effective balance that, on one hand, provides a reasonable level of replacement income during disability and, on the other, promotes a return to work as soon as the insured is medically able.
All plans have a maximum monthly benefit amount. Some are as low as $2,000 or $3,000 a month. Professional or executive plans, on the other hand, have higher limits. Be sure to select a plan with a benefit amount that truly does protect your income. The higher the amount you wish to insure, the higher the monthly premiums will be.
Some plans contain a Social Security offset provision, which prevents over-insurance if Social Security benefits are paid. Some policies may contain a rider that adjusts the amount of benefits at the time of a claim based on whether or not Social Security benefits are received. Others simply offset the benefit by reducing the amount of insurance that can be purchased at the time the policy is purchased.
So, How Much Coverage Do YOU Need? Deciding how much disability coverage to purchase is a personal decision based on a variety of factors, including your family situation, your savings, and your family’s medical history. But make no mistake, sufficient disability income coverage is crucial for your financial security. At the very least, choose a coverage amount that will be sufficient to cover the expenses you expect to have annually.
Time Period for Coverage
The period of disability insurance coverage has two components: the elimination period and the benefit period.
- Elimination period: The amount of time you must wait between the time the disability occurs and the time your coverage begins. The longer you agree to wait, the lower your premiums will be. Elimination periods are typically specified in months.
- Benefit period: The length of time that the disability coverage applies after it begins. The most common benefit periods are two years, five years, or until age 65. The two-year period tends to be too short, since people with severe disabilities tend to be disabled for more than two years. Five years is better, and until age 65 is the best option. People older than 65 don’t qualify for any disability insurance. I personally find this odd considering that many people are working into their 70’s and beyond. Do they NOT depend on their income?
Residual Coverage (what’s that?)
The residual coverage option means that even if you’re disabled and losing at least 20% of your income but are still able to work part time, you’re eligible to receive a portion of your total disability benefit. Be sure to buy a policy that includes residual coverage, since you need some protection from partial disability as well as total disability.
Buy a policy that can be renewed until you turn 65. The best type of policies, called non-cancelable renewable policies, guarantee that your premiums won’t increase. Another type, guaranteed renewable policies, have premiums that the insurer can raise at any time but you do have the option of renewing and the insurer must allow it. With optionally renewable policies, the insurer can terminate coverage at any policy anniversary or renew at a higher premium rate. These three types are, as you may have guessed, priced highest to lowest.
Future Purchase Option
The future purchase option generally allows the policyholder to increase the coverage amount every three years, up to a certain predetermined limit, without the possibility of being turned down. This option makes sense for those who anticipate an increase in their monthly expenses, as well as for those who develop costly chronic conditions that result in disability, such as diabetes.
Cost of Living Adjustment
The cost of living adjustment allows you to increase the amount of your benefits while you’re disabled to keep pace with the rising cost of living. Cost of living adjustments are usually limited to a predetermined annual percentage, such as 5% of the policy’s total benefits per year. If you recover from your disability, your benefit reverts back to the basic amount stated in the policy.
Disability Insurance Costs (you knew it was coming)
Many employers provide employees with disability insurance options in addition to health insurance. But these policies often lack important items, such as renewability and the cost of living adjustment, so be sure to evaluate your employer’s policy to confirm whether you need to buy additional, private disability insurance. Also, keep in mind that COBRA does not allow you to continue your disability coverage if you leave your job or undergo another COBRA-qualifying event.
Private disability insurance varies in cost based on age, occupation, health, coverage amount and policy options but you can expect to pay anywhere from $1,000 to $3,000 annually, depending on your likelihood of disability, the income level you’re protecting, and your occupation. Those test pilots probably pay a lot more.
Buying Disability Insurance
Private disability insurance is not as easy to find and buy as other types of insurance. As a result, you’ll most likely want to work with an insurance agent specializing in disability insurance coverage. Your health or life insurance provider can refer you to an agent who specializes in disability insurance.
Always remember that disability coverage is crucial to your own financial security. Without it, you run the risk of not only becoming disabled for a period of time, but of becoming a burden on your family, draining your finances, being forced to sell your assets, and living a life of physical AND financial dependency. I think purchasing disability insurance is just taking responsibility for the well being of yourself and your family.
Always carefully review the contract, provisions, and terms of any disability insurance plan you are considering before you sign on the dotted line. And please, PLEASE deal only with highly reputable professionals in the insurance industry who represent highly regarded firms with stellar ratings.
Remember that disability insurance coverage is a “risk management” tool. It enables you to shift a portion (up to 60%) of the financial risk associated with your potential disability to the insurance company. Any decisions you and your professional insurance agent make about other features to incorporate into your personal income protection plan should be based on a risk/cost trade-off that carefully examines your personal financial situation, your income, your family’s long term needs, and your current assets.
[tags]insurance, disability insurance, responsibility[/tags]