By Richard A. McGrath, CIC, LIA
The likelihood that you will suffer a disabling injury or illness is high and the resulting financial hardship can be devastating. In celebration of May being Disability Insurance Awareness Month (DIAM), we’re shining some light on the issue. Consider the odds:
- More than one in four people who are 20 years old today will become disabled before age 67, according to the Consumer Federation of America (CFA).
- In the 35 to 65 age group, about 30 percent of Americans will suffer a disability lasting at least 90 days, while one person in seven can expect to become disabled for five years or longer, according to the Million Dollar Roundtable (MDRT), an insurance trade group.
- Illnesses such as cancer, heart attack, and diabetes account for 90 percent of all disabilities that keep people out of work, according to the Council for Disability Awareness (CDA).
Your health insurance may cover the costs of any necessary medical care after a disability, but the loss of your paycheck will not be covered. Given the hardship caused by a loss of income, nearly half of all foreclosures on conventional mortgages are caused by a disability – compared with only two percent of foreclosures being caused by a person’s death, according to the MDRT.
In spite of the high probability of a disability and the financial hardship it can cause, a majority of Americans lack disability insurance coverage. The National Compensation Survey found that, as of 2014, only 39 percent of private industry workers had short-term disability coverage and 33 percent had long-term coverage.
In contrast, more Americans have life insurance coverage, although the chances of a disability are at least three to five times greater than a loss of life, according to the MDRT.
Employer Coverage vs. Individual Coverage
Disability insurance provided or sponsored by employers is typically the most affordable option. However, the benefit level from employer-sponsored coverage may not be sufficient for your income needs. If you think you’ll need additional coverage, consider purchasing an individual disability policy in conjunction with your group plan.
Keep in mind that not all employers offer disability coverage, but they may give their employees the option to purchase coverage through a voluntary program, meaning the employee pays the full cost of the coverage from a payroll deduction. Check with your employer’s human resources department to see what your options are.
An individual disability insurance policy may cost more, but you may be better able to tailor your coverage to your needs. Additionally, benefits from an individual plan are received income-tax free, when paid with after-tax dollars.
Types of Disability Insurance
There are two forms of disability insurance: short-term disability and long-term disability.
Short-term disability replaces a percentage of your income for a limited period of time, typically three to six months. Long-term disability provides replacement income for longer periods of time, such as five years or until age 65. This coverage will typically replace 50 to 70 percent of your income.
Whatever type of disability insurance you decide to purchase, there will be a waiting period, also known as an elimination period, before the benefits kick in. Typically, this period is 30 to 90 days after a disability occurs, sometimes even longer.
If you have savings to cover your loss of income short-term, you can reduce premiums by extending the waiting period before coverage begins. Some policies also allow employees to return to work for periods of time without being subject to a new waiting period.
Keep in mind that every insurance carrier defines “disability” differently. Some policies will pay if you are unable to perform the duties of your own occupation, while others will only pay if you can’t work any occupation for which you are qualified.
Also consider whether you will need coverage if you are able to return to work part-time or in a different job. Some policies will pay only if you are totally disabled, while others will pay residual benefits if you suffer a partial disability and are unable to perform certain aspects of your job. Most plans will waive premiums for a length of time when a person is disabled; some continue coverage past age 65 if a person is still working.
Other factors, including your age at the date of purchase, occupation, gender and health status will affect your premiums.
There are also two major kinds of policies: non-cancelable and guaranteed renewable. A non-cancelable policy can never be canceled as long as your premiums are paid, and your premiums are guaranteed not to increase. A guaranteed renewable policy means your coverage cannot be canceled as long as your premiums are paid, but those premiums can potentially increase.
Your independent agent can help you review and select coverage based on your individual needs and budgetary considerations. Ask your agent to review any exclusion clauses, renewability terms and optional riders, such as cost-of-living adjustments.
Regardless of the policy and options you choose, review your disability insurance regularly with your agent to ensure that it reflects any changes in your level of income and employment status.
Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group of Sturbridge, Mass. He can be reached at 508-347-6850 or at email@example.com.
This article is written for informational purposes only and should not be construed as providing legal advice.