How Could a Disability Affect Me?
Most workers seldom think about the financial consequences of long-term disability. Yet the loss of earned income during an extended disability can be financially devastating. Not only is earned income lost but medical bills are likely being incurred, savings are reduced or depleted, employee benefits may be lost, and additional expenses are incurred, such as getting someone to care for the disabled person. If you don’t have disability insurance or enough emergency savings to last 3-6 months (the average duration of a short-term disability claim), then you are ill prepared if a disability occurs. Disability income insurance should be a high priority in a personal risk management insurance portfolio.
What Are the Odds?
Higher than you think. Accidents are not usually the culprit. Back injuries, cancer, heart disease and other illnesses cause the majority of long term absences. The Council for Disability Awareness, www.disabilitycanhappen.org, offers the following statistics:
A typical female age 35, 5’4″, 125 pounds, non-smoker who works mostly an office job with some outdoor physical responsibilities, and who leads a healthy lifestyle has the following risks:
- A 24% chance of becoming disabled for 3 months or longer during her working career
- 38% chance that the disability would last 5 years or longer
- average disability lasting 82 months
If this same person used tobacco and weighed 160 pounds, the risk would
increase to a 41% chance of becoming disabled for 3 months or longer.
A typical male age 35, 5’10″, 170 pounds, non-smoker who works an office job with some outdoor physical responsibilities, and who leads a healthy lifestyle has the following risks:
- A 21% chance of becoming disabled for 3 months or longer during his working career
- 38% chance that the disability would last 5 years or longer
- average disability lasting 82 months
If this same person used tobacco and weighed 210 pounds, the risk would
increase to a 45% chance of becoming disabled for 3 months or longer.
Lifestyle choices and personal behavior that lead to obesity are becoming major contributing factors.
- 1 in 7 workers can expect to be disabled for 5+ years before retirement.1
- Just over 1 in 4 of today’s 20 year-olds will become disabled before reaching age 67.2
- Over 37 million American are classified as disabled; about 12% of the total population. More than 50% of those disabled American are in their working years, ages 18-64.3
Common Causes of Disability Claims
The four most common causes of existing long-term disability claims in 2013 (and 3 years prior4) were:
1. musculoskeletal system and connective tissue (28.7 percent of all existing claims)
a. arthritis, herniated disk, back pain, tendinitis, osteoporosis, sciatica
2. nervous system and sense organs (15.2 percent)
3. circulatory system (12.4 percent)
4. cancer (9.1 percent)
Most claims are NOT work related and not covered by workers compensation.
What Can I Do to Protect My Income?
If you are employed and have earnings, we encourage you to obtain long-term disability insurance, as it is the bigger financial risk. However, in the absence of solid emergency reserve savings (3 to 6 months+) it is may be wise to have both short and long-term disability insurance.
Review your employer benefits and make sure you enroll for both. Pay the premiums with after-tax dollars so that if you need to go on claim, your disability benefits will not be taxed. Generally, disability insurance will replace 60% – 80% of your gross earnings, not including bonuses. Moreover, group coverage often requires you to acquire social security disability insurance (SSDI), which the group policy then supplements to arrive at the 60% replacement benefit. Depending on your occupation and your earnings, employer provided coverage may not be enough. You may need to obtain a personal disability policy to cover the gap from your group policy.
It is important to understand the terms and definitions of your disability policy coverage. Given that there are several definitions of “total disability” you should know the difference and words matter. There is a difference between inability to perform: 1) all duties of your own occupation (most liberal) and 2) the duties of any occupation for which you are reasonably fitted by education, training, and experience (more restrictive); and 3) the duties of any gainful occupation (most restrictive) and the loss-to-income test.
Premiums for private disability insurance vary and are dependent on factors such as age, health, occupation, elimination period, benefit period, etc. The general rule of thumb is 1% to 3% but can be as high 5% of the compensation coverage.
*If you would like more information, ask us to send you “some important things to look for in private disability insurance.”
Summary
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1 “Commissioners Disability Table, 1998,” Health Insurance Association of America, the New York Times, February 2000
2 U.S. Social Security Administration, Fact Sheet June 30, 2017
3 U.S. Census bureau, American Community Survey, 2011
4 2014 CDA Long Term Disability Claims Survey Disability Claims by Diagnosis
Written by Paul Roldan, Ana Fernandez, CFP® and Teresa Talton, CFP®, with Allgen Financial Advisors, Inc.
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