When most people think about insurance, the first things that come to mind are health and life insurance. We all realize how important it is to provide insurance that can pay doctor bills when we’re sick, and we understand that in the event of our death, it would be nice to leave some money to a spouse or children to help them through that difficult time. What isn’t often considered is insuring against the financial consequences of disability. In fact, when compared to life insurance, you are far more likely to find yourself needing disability coverage than insurance upon your death.
The High Probability of Disability
According to a study done in 1993 by the Unum Life Insurance Company of America titled Disability management: Costs and Solutions:
- In 1990, employers reported slightly more than 60 million lost workdays from occupational injuries and illnesses.
- Three out of 10 working individuals between the ages of 35 and 65 were disabled for 90 days or longer.
- Almost one in five individuals between the ages of 35 and 65 will become disabled for five years or more prior to turning 65.
- For people under age 65, the probability of disability is higher than the probability of death. A 32 year old is 6.5 times as likely to suffer a disability of 90 days or more ashere or she is to die.
What is Disability Insurance?
Disability income insurance is designed to indemnify the insured for income lost when they cannot work. If you suffer a prolonged illness or injury that prevents you from doing your job, this insurance is meant to supplement the income that you otherwise cannot earn. These policies can be found through group employer coverage or a stand-alone individual policy.
Loss of Income is the Worst Type of Loss
Think about this. When you get into an accident with your car, or your home is damaged or destroyed, it can be replaced. This isn’t to say the loss is any easier to handle, but these policies ensure that the asset is able to be repaired or replaced. If you become sick and need medical attention, medical insurance covers most or all of that expense as well.
But what happens when you become seriously injured or sick to where you cannot perform your job? If you don’t have any insurance protecting that loss of income, it can be devastating to your finances. How long could you go without income? If you have an emergency fund, hopefully you could make it a few months, but what happens if you are unable to work for three, six, or eight months or more? The loss of income undermines your ability to obtain and maintain all of your other financial needs.
I’m Not Worried, Social Security Has Disability Coverage
This is one of the worst assumptions you can make. Yes, it is true that Social Security has a disability benefit, but there are some major problems surrounding the program. Even if you do qualify for Social Security disability, the benefits are usually not sufficient for most people.
What is even more important to consider is the ability to even qualify for benefits to begin with. Social Security uses a very strict definition of disability that says your disability must make it impossible for you to perform “any occupation“. If your job requires the use of your legs and you find yourself in a wheelchair due to an accident, don’t expect Social Security’s disability to kick in. Since you may have perfectly working hands, arms, and upper body, there are plenty of jobs out there that you could do, so you are more than likely going to be denied.
To better understand how strict Social Security is when it comes to qualifying, they define disability as:
The inability to engage in any substantial gainful activity by reason or any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. A person must not only be unable to do his or her previous work, but cannot, considering age, education, and work experience, engage in any other kind of substantial work which exists in the national economy. It is immaterial whether such work exists in the immediate area, or whether a specific job vacancy exists, or whether the worker would be hired if they applied for work.
To make matters even worse, Social Security disability benefits have a five-month waiting period, otherwise known as an elimination period. Even if you are “fortunate” enough to be qualified for a benefit, you’ll have to wait five months before receiving anything at all, plus the amount you do receive will likely only be a fraction of what your income used to be. That is a situation most people simply can’t afford to be in.
Short-Term vs. Long-Term Disability Policies
There are two distinct types of disability policies: long-term and short-term. In most cases, short-term disability coverage provides benefits for six months up to one year. There are some policies that provide coverage for up to two years. Unlike Social Security, these policies typically pay benefits after a waiting period of 0 to 7 days. This is the type of policy that you’re likely offered as part of your employer’s benefits package through a group plan.
A long-term plan is used to insure against long periods of disability. In many cases, up to age 65, and sometimes for the rest of your life in the event of an accident. Waiting periods for these policies are much longer: typically from 30 days to 2 years. This type of policy is designed to go into effect after short-term coverage has ended. Some employers also offer long-term disability as an additional benefit the employee can purchase. Individual policies can be obtained as well.
Make Sure You Have Adequate Disability Coverage
Check with your employer to see how much, if any disability coverage they provide as a benefit. You may find that they offer a short-term policy that pays upwards of 65% of your income for anywhere from six months to two years. If this benefit isn’t provided to you at no-cost, you should check with your human resources department to see if it is an additional benefit.
In addition, you should also check to see if your employer offers any sort of additional long-term disability coverage. Again, when you’re looking to cut back on premiums, you always want to check with your employer first since they will generally provide group coverage. If they don’t, some may provide the coverage through a third party that can set you up with an individual policy.
If your employer doesn’t offer any coverage, you’re self-employed, or otherwise just don’t have disability coverage, you should seriously consider the financial consequences if a disability occurred. How long would your savings last? Would you be able to still maintain expenses when losing an income? Would you have to drain your retirement assets? There are serious consequences when losing an income, and disability is the leading cause of bankruptcy and home foreclosure, so it pays to have the piece of mind knowing you won’t be out on the street if you become disabled.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
What do you do if you have an existing condition that disability insurance companies won't pick you up? They have a list of diseases that exclude you immediately. So what are people in these circumstances to do?
I found a website that offer Low Cost Disibility High Limit Accident Insurance Coverage. Check this website out.
A loss of income can definitely strike very hard if you should become disabled, since it might be hard to work the extra hours needed to your economy back on track even if you can get back to work. A emergency fund or a disability insurance is the way to go.
Great post! I'd like to point out that PT & FlexT employees generally cannot buy into either or both group disability policies as those "benefits" are typically reserved for FT employees.
BTW: Anyone know of a good STD/LTD rating site?
Every time I see a post like this I email it to my husband making sure that we are on top of this. I think this is such an important topic for folks to discuss because it is often ignored until something happens and they realize they don't have adequate coverage.
I think I'd like to see more information on the types of coverage that may be available outside of an employer should you be self employed. Right now the only other option I can think of would be Aflac.
Every employer I have been with has offered long-term disability insurance and each time I sign up for it. As a single person, I want to cover all the bases I can. My current employer also offers short-term disability, which applies after 7 days. It is reassuring to have this benefit offered and I pay modest payments each check to keep it. I recommend signing up right away when hired and looking into it if you do not currently have coverage through your employer.
Thanks for the reminder. I also am in California which has some kind of program, but now that my wife and I are getting a little up in years I've been meaning to check out some policies for both this and life insurance. After tax time I'll get around to this :)
I recently cancelled my short-term disability because it was for 60% of my salary, but California already has a program that would give me 55% of my income. So I was paying for 60% but would really only get 5% more than otherwise.
My company pays for long-term and a small life insurance policy.
Thanks for bringing that up, Ron. It is hard to cover every aspect of disability insurance, but how you pay for it can be an important thing to consider. If the benefit is for say 60% of your normal wage, whether or not the benefit is taxed can make a sizable difference in how much money you really receive.
And thanks for the stumble CHM!
It's also important to point out how you pay for your insurance. If your employer pays for it OR you use pre-tax dollars to pay for it, then the benefits are taxable. That means if you get 2/3 of your paycheck as a benefit, you'll pay additional taxes on that 2/3.
However, if you pay for it with after tax dollars, the benefits are not taxable in most cases. You would keep all of your 2/3. Since I take home about that much anyway, I elected to pay for my coverage with after tax dollars.
Added note: people in some demographic groups are more likely to be disabled than they are to die, yet the same group will have life insurance, but not disability. What's up with THAT?
Great piece Jeremy. I think if you have a family, having disability coverage should be a major priority. I think the example of your friend, with the 1 year coverage, is a great example of the damaging effect not having this kind of insurance can have.
It's something I plan on promoting more in my business, and this article helped to put it back on my radar.
Well worth a Stumble:)
This is a great post - so many people forget about disability insurance, focusing their efforts on securing life, health, etc. As you point out, the odds are greater that we will need disability insurance before life insurance.
That is great, but this post has nothing to do about being insured by Unum, recommending them as an insurer, or what they may or may not have done in the past. It simply mentions some statistics from a study.
Are you having a laugh?
Unum the same company about to face various RICO ACT trials. No one in their right mind would want to be "insured" by Unum, unless of course you thoroughly enjoy losing absolutely everything you worked hard for all your life and trying to survive a protracted legal process.
From - Another deceived Unum policyholder
PS- There are hundreds of thousands of us everywhere...
Well, every company is certainly different. My previous employer was the same way, but more often than not I've had a very basic short-term coverage provided, and the ability to purchase additional long-term.
But that is why it is important to check and see what they offer. Don't want to expect one thing and get the other.
And Lily, it all depends. It is impossible to predict the future, and it also depends on your short-term coverage. For example, a friend of mine was in an accident and was badly injured. While he did have short-term coverage that lasted a year, he was unable to return to work for almost 2 years while going through the rehabilitation process. He didn't have any additional coverage, so it really put his finances in a bind and a lot of it went on credit cards. You just never know.
My company only offers group long-term disability coverage and no short-term. Funny that you report that many companies do the opposite.
I believe that short-term disability could be replaced with a hefty emergency fund.
I'm pretty sure my employer auto-enrolls everyone in short-term disability insurance, but employees have to elect (and pay for) long-term coverage. How necessary would you say long-term disability insurance is?
Many larger corporate companies actually provide disability insurance for their employees. I know my company does, so it is worth looking into to see if your company does as well.
Great article, this kind of insurance is indeed overlloked, and often times needed at some point or at some level.