When people think of insurance, they think of life insurance, or auto insurance, or homeowners insurance. Rarely do they think about disability insurance (DI), yet this is a vital part of a person’s insurance portfolio. The odds of a person experiencing an extended disability due to illness or injury during their working life is remarkably high: about 25% of the population will suffer a disability that will put their income at risk. Yet, when people are told about disability insurance, they see it as an expense rather than a way to mitigate their risk of losing their income. So let’s take a look at some of the myths surrounding disability insurance that relegate this very important insurance to the bottom of their priority list of risk mitigation.
About 33% of employees do have some disability insurance through their employer. For those fortunate 33%, the first myth is believing this is all the DI coverage they need; however, that is often not the case. Many group DI policies are very restrictive and only pay if a person cannot work at all in any occupation. That means, for example, if a surgeon develops debilitating arthritis in her hands and can no longer perform surgery, but can still work at another occupation, say teaching, then the group policy will not pay a benefit to her. Further, if the employer is paying the premium for the policy with pre-tax dollars, any benefits paid become taxable income. Given that DI policies only pay between 60% and 66% of their gross salary, taxing this benefit can drop the net proceeds by over a third. Both of these issues make group DI policies a less than ideal alternative to individual DI policies. And the remaining 67% of uncovered employees have no income replacement in the event they cannot work due to illness or injury.
The second myth is the idea that dying prematurely is more likely than becoming disabled and losing income during one’s working years. In fact, the risk of serious disability due to injury or illness is surprisingly high. In fact, that the risk of a serious disability that puts somebody out of work from the age of 20 through retirement at age 67 is about 25%. And according to a report by Unum Insurance, 60% of their disability claims are for women! Compare this to the risk of dying prematurely: approximately 17% for males between the ages of 25 and 64 and about 11% for females in the same age bracket.
The next myth confuses workman’s compensation insurance with disability insurance. These are completely different products: the former is designed to provide wage replacement and medical benefits resulting from an injury or illness that is directly caused by activities in the course of employment. DI provides wage replacement, typically up to 66% of income for any injury or illness that precludes a person from working for an extended period. Fewer than 5% of disability claims are directly work related and are covered by workman’s compensation; 90% of disability claims are the result of illnesses that are not connected to employment, and therefore are not eligible for workman’s compensation. The point here is that you’re chance of suffering a non-work related disability that puts you out of work for an extended period is at least 18 to 19 times greater than suffering a work-related injury or illness. Therefore, workman’s comprehensive insurance is not a substitute for disability insurance.
The last myth I want to discuss is the myth of being too young to buy disability insurance. It turns out that over 40% of disability people under the age of 50 make claims, and people under 40 make almost 14% of claims. Further, just like life insurance, the younger you are when you buy disability insurance the less expensive the premium, and the more likely you will be underwritten. In other words, as you get older, there is a good chance that an insurer will not underwrite a policy due to pre-existing conditions, or rate a policy, adding to the premiums, which will already be more expensive because of age.
Now keep in mind that insurers are very conservative when writing disability insurance. That means that different occupations are rated differently and will have different premiums to account for risk; some occupations cannot be underwritten at all, especially those that have a high risk of on-the-job injury and/or illness. Often, people in high-risk occupations have to get disability insurance through specialty carriers that have experience underwriting and pricing policies for these individuals.
Another important point is that a person must have an income to get a disability policy. That income can come from salary or self-employment income (which has to be documented). People without an income or a steady income cannot purchase a DI policy, since the amount of coverage is directly tied to steady, current income. This can be problematic in situations where a spouse provides support for a self-employed breadwinner by doing activities such as marketing, administrative support, or bookkeeping, but is not compensated. Because there is no separate compensation, this supporting spouse cannot get a DI policy. In the event the non-working spouse cannot provide these essential services due to a disability, the primary breadwinner will need to hire or contract with a person to provide this support. That means higher expenses for the primary breadwinner. In order to mitigate some of the financial risk, it may be worthwhile to put the supporting spouse on the payroll at a market salary or wage so a policy can be considered for underwriting.
There are numerous other considerations besides what I’ve discussed in this article. These issues include elimination periods, partial disability vs. total disability, various riders, Own Occupation policies, and balancing coverage and premiums with the rest of an insurance portfolio. That requires an agent or financial advisor experienced in disability insurance products. The point of this article was simply to dispel some myths pertaining to disability insurance, and to motivate people to consider these policies as a part of an overall insurance portfolio.