What Are The Odds?
I talk a great deal about financial planning – investing wisely, staying out of debt, protecting your family with life insurance, protecting assets with long-term care insurance, etc. In that same vein, this week I’ll honor Disability Insurance Awareness Month (Who knew there was such?) with a discussion of… disability insurance.
So what is disability insurance? It’s insurance on our income; it provides income when a person is unable to work for a short time or an extended period. According to the Council for Disability Awareness, more than half the American workforce has no disability income (DI) insurance. None. This leaves these workers vulnerable to financial disaster in the event of illness or injury.
Many people mistakenly believe that if they can’t work, they’ll simply apply for government-sponsored long-term disability coverage and bingo – income! Right. It’s easier said than done. The process to be approved for Social Security Disability Insurance (SSDI) is arduous, thorough and often frustrating. It typically takes multiple months, even years, and the applicant must usually have been disabled for at least a year to qualify to apply. More than two million people apply for SSDI each year, and approximately 700,000 are approved, so the odds of approval are not terrific. And then for those who do receive SSDI benefits, the average benefit in 2017 is only $1,171 per month.
So what can we do to protect ourselves? Purchase disability income insurance, of course. And like many insurances, it pays to start young. The cost of DI is based in part on the age of the applicant. Other factors, however, include current income and occupation.
DI replaces a portion of income, so if an insured person “goes on claim”, meaning he/ she becomes eligible to file a claim against his/ her DI insurance policy, the policy typically pays a set percentage of the full-time income. Typically th higher the income to be partially replaced, the higher the premium will be to protect that income. That’s logical, right?
Risk is always a factor in any insurance underwriting decision, which is where occupation matters. Most people would assume that people in high-risk occupations, such as stunt pilots or firemen, would have to pay higher DI insurance premiums, and that would be a correct assumption. However, I quoted a policy last week on a dental hygienist. Based solely on her occupation, her risk was deemed to be higher than average. Why is that? Because with even a relatively minor injury to her hands, arms or eyes, she could be unable to perform the duties of her job. My son is a dentist, and I get nervous watching him use a butter knife!
But injuries at work actually represent only a fraction of the cause for DI insurance claims. Our lifestyles and choices actually play a large part in eventual claims. A typical 35-year-old female non-smoker who weighs 135 pounds, works an office job and maintains a relatively healthy lifestyle has a 24 percent chance of becoming disabled for three months or longer during her working years. If that same person used tobacco and weighed 160 pounds, her chances of disability would increase to 41 percent. Wow!
According to the Council for Disability Awareness, the leading cause for disability claims are musculoskeletal/connective tissue disorders (28.5%), cancer (14.6%), injuries and poisoning (10.6%), mental disorders (8.9%), and cardiovascular/circulatory disorders (8.2%). As I indicated, many of these issues might have nothing whatsoever to do with work behaviors, and some are utterly out of our control.
The truth is that one in four of today’s 20-year-olds will become disabled. Ignoring that possibility and choosing to leave our income unprotected is simply not wise. DI insurance is typically affordable, and I have never talked to someone who needed it who didn’t thank their lucky stars for the wisdom of their purchase