What’s the WORST Financial Thing That Could Happen?

by Ron Haynes

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:

  1. How much do I need?
  2. What time period do I want to cover?
  3. Should I get residual coverage?
  4. Can I renew the policy easily?
  5. What are my future purchase options?
  6. 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.

Renewability
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. :D

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.

Conclusion

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]

About the author

Ron Haynes has written 1001 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.


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{ 18 comments }

Aaron Stroud

Whew, I just started preparing a lengthy response. But I think it’d work better as a post. So I’ll just throw in one thought for now.

Some workers might have a genuine need for disability insurance, but the need isn’t universal. Many close-knit families provide this same benefit, free of cost. It has nothing to being a burden, it’s simply lovingly taking care of your own family.

Ron

#Aaron Stroud→

You’re right, all insurance isn’t needed by everyone. My main concern is that the greatest asset I have, my ability to generate income, could be severely damaged by one little slip from a ladder or from one small accident.

Deb

Oh Disability Insurance is a MUST!! I have been out of work for 3 years now with a back disability. All I did was bend over to put on socks getting ready for work and my back blew. Two surgerys and many procedures later I am still out. I was lucky that I was smart enough to purchase through my employer, post tax disability. I should have purchased additional insurance outside outside of the company. I am barely making ends meet, I cannot work becuase of this disability that as I said was the result of putting on socks.

Journeyer

Yes, yes, yes. You do need disability and life insurance. Don’t ever think that “it will never happen to me”. A few years ago, we were looking at cutting back our expenses and tossed around reducing our insurance. Not long after I was diagnosed with leukaemia. Thank goodness we didn’t change our policy! And don’t just cover the breadwinner. While I’m a stay at home mum, the payout means that if my illness progresses, my husband will be able to take time off work or hire someone to help with the kids and house without worrying about money.

Jeff@My Super-Charged Life

Ron – This is a very comprehensive article. You did a great job of covering all the angles. I’ve had enough life experience to know that it CAN happen to me. I think it is very easy to overlook disability insurance. It is kind of a bummer to think about, but it is certainly necessary.

Four Pillars

Excellent post. Most people don’t realize that disability is a lot more likely than death. Plus, life insurance is easier to understand and shop for.

Aaron – not sure what type of family you are thinking of but I’m the only bread winner in mine so we need DI.

Mike

Shamelle

Disability, fatal illness etc are not things we like to think about on a daily basis. However, life is such that these things do occur when we least expect it.

You have put together a comprehensive post on being prepared for it. Good post.

Mrs. Micah

This is quite timely, I’ve been thinking lately about getting this. With Micah’s being a student and my unconventional work situation, figuring out what we need is a bit confusing.

Mrs. Micah

That is, a full-time student (in that he’s writing the dissertation) AND a part-time teacher…

Aaron Stroud

“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?”

Ron, it’s not that they don’t depend on their income. They simply can’t afford to pay the premiums that would be required to insure someone in that risk group.

Ron

#Aaron Stroud→

Disability isn’t even offered for those over 65.

Aaron Stroud

Disability insurance for 65+ would exist if there was:
1. a demand for disability insurance beyond age 65
2. it could be sold at a profit
3. at a price that people were willing to pay

If one of the above points is missing, the product or service won’t be available for long. My hunch is that after 65, the likelihood of sustaining a disability is so high that an insurer would have to charge far more than most people are willing or able to pay.

Ron

#Aaron Stroud→

In a free market, that would apply, but IIRC there is something in the medicare law that prevents it being offered. Government interference screws up everything!

What’s the likelihood that every single person loses ALL interest in disability insurance the day they all turn 65?

Aaron Stroud

Interesting. I wasn’t aware that medicare took that right away as well… You are so correct about the end result of government interference!

Good intentions isn’t enough to bring about a positive result! Have you watched Milton Friedman’s Free to Choose series recently? You can watch the entire series online here. The world would be a much better and free-er place if everyone would face the facts he presents.

Catherine R

The need for disablity insurance: case in point. Me at the time: 35 years old, healthy, working, strong as an ox, sprained an ankle, sprained my back = “Permanent Partial Disability” lost: 15 year career, 2 college degrees (it wasn’t a desk job). If I were on social security I would have about 1200 per month. If I were in any other country I would have zip. I have disabilty payments until I turn 62. I had short term and long term coverage at the time and was very glad of it. Don’t think it can’t happen to you.

AnnMarie

I know this is an older post, but you might want to correct something. Social Security Disability Insurance = SSDI. This is paid to people based on their work history (length of time, credits, and salary) (or, if disabled before a certain age, their parents’). Specifically, “insured workers, their disabled surviving spouses and children (disabled before age 22) of disabled, retired or deceased workers.” You do not need to have worked 10 years but rather have received 20 credits in a 10-year period. I believe you can get that many in 5 years so you could qualify if you had worked for 5 years during the 10 years preceding the disability.

SSI = Supplemental Security Income. This is used for people with little or no income or resources. For example, my sisters-in-law who were disabled from birth receive SSI.

Beth

All are points well taken.
I can add my experience to this – I NEVER thought it would happen to me.
After all, i’d been working since I graduated from high school either part time or full time,
and thanks to great computer skills, had never been without work longer than a few months.

Well, guess what? Disabililty happens. When I had an accident, I thought it would be temporary. It wasn’t. I was not insured at the time (and still don’t have insurance), so lack of proper care most likely caused my injury to go from annoying to life-changing. I tore the ACL in my right knee. With no actual treatment (I was turned away from the local hospital due to lack of ins coverage as this was not considered “life threatening”) and no rehab, it has left me permanently disabled. The problems from the knee and overcompensation has now created an arthritic response in the same hip, and I now walk like a weeble, and must use a cane if I try to go any distance further than from the bathroom to the bedroom. I can no longer work outside the home, because I can’t get around. The added stresses are unbelievable.

We also lost our home when hubby was laid off. After all, I was a huge portion of our income, and mine was gone. Then when his was gone too, we had nothing to bargain with. At that time, there were layoffs everywhere, and no one was buying homes but the foreclosure vultures. So, we lost everything we had spent our lives working for.

It wasn’t pretty, and continues to be a source of stress. I have finally waived the white flag on trying to actually get well enough to hold a real job, but I have to face the facts that it isn’t going to happen. I’ve not been able to work for 3 yrs now, and been out of our little rented townhome maybe 4 times this year. It is too hard for me to use the stairs AND try to walk around anywhere. (And no, we haven’t been able to find a decent place we could afford on one salary for myself and our older kids, a freshman and a sophomore.)

So, I’ll be giving up, in effect, and am now looking into filing for SSI disabililty. I worked for 25 yrs, so getting into the program isn’t an issue, but getting the info and approved might be. I’ve heard it is all uphill, but have no idea what is really involved. But, I finally decided that I needed to face it that my working life was shot in the foot way too soon, and to just file so perhaps some extra monthly income would help us survive. We barely make it right now.

So, while not everyone might need disability insurance, I think it is a subject that EVERYONE should consider, and make some possibility planning for. I NEVER thought it would happen to me, and certainly never thought it would have such long-reaching consequences. (Of course, I never thought a hospital would turn anyone away without a second glance either.) So, it can and does happen. I wish I had been prepared, and had considered that I was not invincible. :sad:

Dennis

:???: People really need to understand what a LTD Policy really is! IV been paying for a LTD Policy since I was 18 years old! I also worked for the same company all theses years! I was injured on the job. Started collecting my LTD right away with no hassles. But I think this had alot to do with my LTD Company knowing that I filed for workmans compensation & SSD. People really need to understand that LTD Insurance will help you out in a time of need. But its just a glorified secured LOAN in many cases! Heres a Heads Up for People waiting for Workmans Compensation. Do not accept a lump some for workmans comp. Tell your atterney that you want your offer structured, until your 65. If you dont! Your LTD Company will want it ALL and they will stop your LTD payments. Like most LTD Companies, they only allow you to earn 50% of your prior income. Everything over this, belongs to them :cry:

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