Disability Insurance, Who Needs It?
Many people buy life insurance after giving serious thought to how their death might impact their families' living standards. Few, though, give the same level of consideration to disability insurance. Ironically, the typical worker faces a much higher risk of extended disability than of premature death. Ironically, disability insurance remains one of the most overlooked and misunderstood forms of insurance.
Though disability is behind a significant number of home foreclosures and personal bankruptcies, insuring against it has not been a high priority for most workers because many assume they're already covered through Social Security, state-mandated Workers' Compensation or employer-provided group plans. However, there are numerous holes in this safety net of coverage.
Statistics say a healthy 20-year old worker today has about a one in three chance of becoming disabled before retirement. More startling, that number stays almost as high among workers who are 55-64 today. A 35 year-old, white-collar male who suffers a disability lasting 90 days or longer will be out of work for an average of about six years. The study found that disabilities are lasting longer for female workers too, but the increases have not been as pronounced when compared with the male population.
Only about 39% of the 2.1 million workers who applied for Social Security Disability Insurance benefits in 2005 were approved. And those who are approved get an average benefit of just $1,004 monthly – hardly enough to replace the average worker's income. Workers comp covers only work-related disabilities, but 95% of disabling accidents and illnesses aren't work-related.
And what about coverage through work? It’s a great employee benefit, but it’s not available to many workers. Only 36% of all full-time employees have access to long-term disability insurance through their employers.
So what’s a worker to do? Explore your options. If your employer offers disability coverage, take the time to find out if the coverage would be sufficient to meet your income replacement needs in the event of a disabling illness or accident. If it’s insufficient, your employer may offer you the option to increase your disability benefit, often through a voluntary payroll deduction. Another option is to purchase coverage on your own.
Individual disability plans are a great option to replace your income or supplement employer provider coverage. The benefits from an individual plan are treated differently than a group plan that your employer provides for you. Any benefits received from an individual plan are tax free as long as you are the one paying the premiums. Employer group plans that are provided free of charge would result in a tax on the benefits as regular income. This can be important as the normal disability coverage usually will replace 50 to 66% of your salary. If the benefit is taxed that could result in less than half of your salary after taxes.
So, is it hard to qualify for disability coverage? That depends. Most group plans through employers are guaranteed issues policies but, you would only be covered as long as you work there. Most individual policies would require complete medical underwriting. They would take into account your health and any medical conditions you may have. They would also take into account your occupation as some jobs are more hazardous than others. You have more options with an individual plan. You will be able to choose the benefit amount, how long the benefit period is up to age 65 and a myriad of other options including return of premium. Your individual plan also travels with you no matter where you work.
You may not realize it, but your home, your car and your jewelry are NOT your most valuable assets. It's your ability to earn an income. Without it, you wouldn’t be able to make your monthly mortgage or car loan payments.
Now is the perfect time for disability insurance “reality check.” Take this opportunity to make sure you’d be ok financially in the event of a disability that keeps you out of work for an extended period of time.
Joe Ruden
Barrett Insurance
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