Could a disability really happen to me? Many believe they are more likely to win the lottery than become disabled during their working years; this belief is simply not true.
According to the Social Security Administration, 1 in 4 individuals in their 20's will become physically challenged before reaching retirement. Most people recover from the disability and return to work after a certain period, however some are forced to take different jobs with lower incomes or even worse, may never be able to work again.1
Becoming disabled during one’s lifetime has a 25% greater chance than the events listed:2.
|Life Events||Individuals who believe this event is more likely than a Personal Disability||Actual Odds|
|Winning the Lottery||15%||.0000004%|
|Struck by lightning||11%||.02%|
It is also important to note that not only is becoming disabled more common than one would think but in addition, it is not exclusively the result of a car or motorcycle accident. According to The Council for Disability Awareness, most disabilities are caused by chronic medical conditions such as depression, cancer and pregnancies. These disabilities are fairly common and events that could happen to anyone.
Young families and individuals in their 20's, 30's, and 40's have a lot going on at once. Perhaps you just bought your forever home, your 401(k) has enough digits now to catch your attention and you have been maxing out your Roth IRA for years. Despite the commonly shared struggle to balance life’s surprises and still build towards retirement, would it shock you if I told you that your most important financial asset wasn’t your home or your 401(k)/IRA? Maybe you don’t give yourself enough credit because it is actually YOU that represents your biggest financial asset. The value of an income is underestimated. It is not a single year of pay, but the future lifetime income stream compounded until retirement.
We all have goals and specific things we hope to accomplish, however none of these are possible without future income. We tell our clients time and time again that their biggest financial asset is their ability to remain in their current work environment. If you are an executive, which we like to describe as “intrapreneurs” of your respective company, the best possible outcome for your net worth and family’s well-being is to remain employed and continue to earn income/bonuses and stock options. Employment is far more valuable than an extra one or two percent in your investment portfolio.
If earning enough income to meet your goals and support your family’s needs is the most important financial asset, then protecting your current and future income should be a top priority. Many individuals feel that they are fully covered through their group disability insurance plan and most definitely group coverage is good to have and better than nothing, but it is simply not a large enough dollar benefit and is tied directly to your employment. Remember, you might change jobs either at your own choosing or due to other circumstances and when you leave your employment, your group disability insurance is terminated, thus leaving you without this important coverage.
The first step to educating yourself about disability insurance is to understand the difference between a short-term and a long-term disability:
- Short-Term: Benefits paid for, typically 3-6 months, after an individual has run out of sick leave and/or paid time off.
- Long-Term: Benefits that begin after a period of time, typically 3-6 months (called an elimination period) and pay for a period certain or to age 65, age 67 or, sometimes for a lifetime.
The second step is to understand how insurance companies define disabled:
Most individuals are not aware that there are multiple definitions of disability:
The best definition, which is commonly used for individual policies is called, Own Occupation. This is the broadest definition and provides the most protection for an individual as it pays benefits in the widest range of scenarios. This definition only takes into consideration the specific job you have right now. In fact, even if you are able to eventually return to work with income the same or more than it was prior to your disability, you could be able to continue receiving benefits as long as it is a different job than you had at the time of the disability.
Modified Own Occupation: This is typical coverage for a group disability policy and is far less preferred compared to own occupation. Modified own occupation stops paying benefits once you are able to return to a work in a field that you are “generally qualified for.” As long as your job is closely related to your professional background, meaning it does not even need to be the exact job prior to the disability, your insurance benefit will end.
Any occupation: This definition of disability is extremely hard to qualify for and is the definition the Social Security Administration (SSA) uses. If you can do essentially any job, regardless of income, your insurance will not pay a benefit. This is a major reason why one should not count on Social Security disability payments as part of your disability coverage.
The third step is to weigh the pros and cons of group vs. individual disability coverage:
Pros to Group Insurance:
- Less expensive than an individual policy
- No medical underwriting necessary
- Convenience as your employer provides and handles the benefit selection process
Cons to Group Insurance:
- Group insurance premiums can increase as your company renews its coverage annually
- Benefit amounts are often less and capped – group policies often have longer elimination periods and the benefit payments may not last as long
- Definition of disability – often you must be 100% disabled and unable to perform your occupation to collect benefits on a group disability policy
- Not portable, meaning if you terminate from your employers group plan and/or switch jobs, you are no longer covered until approved under your new employer’s benefit plans…..if they have one. This gap is a major concern and reason to have supplemental individual coverage to stack on top of your group coverage
- Benefits are generally taxable as premiums are paid with pre-tax dollars
- Benefits can be cancelled by the employer
- Benefit amounts can be reduced when integrated with Social Security Disability benefits
Pros to Individual Insurance:
- Unless you have an automatic increase and/or a future purchase option, premiums remain fixed
- Typically, higher benefit amounts that pay until age 65
- Individual disability policies can act as a supplemental policy on top of your group disability policy or they can be your only policy if your employer does not offer a group policy
- Portable - Even if you switch jobs, which is a high possibility especially for millennials, your individual policy moves with you and will pay in the event of a disability even if you are not employed, as long as the policy is still in force
- Benefits are generally tax-free as your premium is paid with after-tax dollars
- Benefits may not be subject to a reduction when integrated with Social Security Disability benefits
Cons to Individual Insurance:
- Medical underwriting may be necessary depending upon the benefit amount
- Can be more expensive than group disability insurance
- It takes time and effort to seek out quotes, determine which carrier, and types of coverage/riders
In conclusion, if we knew when our clients were going to die, we would be able to tell them when to buy life insurance and how much. If we knew how long a potential disability claim would be than we could tell them exactly when, how much and how long the benefits applied for should be. Unfortunately, it is not that simple and so the best way to assess this decision is by determining how long you could survive without your income and that is a task best done with a professional.
No one wants to think about becoming physically disabled, however it is important to protect your family’s financial well-being and simply relying on Social Security Disability insurance and/or group disability insurance is not the best strategy as many of those claims are denied. Disability insurance provides protection and there is no better time than now to ensure that your health and most valuable asset, YOU, are in good hands.
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1Social Security Administration
2Council for Disability Awareness, “America’s Income Protection Picture Disability Awareness Study.”