Sensible Perspectives

Five Common Misconceptions About Disability Insurance

Posted by on November 19, 2014

Over the past two years, I’ve been working with a team from the Society of Actuaries to assemble perspectives on disability for financial planners. We produced an extensive presentation for planners. I’ve delivered it several times – at NAPFA, FPA and other professional meetings, and in webinar form. I’ve spoken about the subject on the radio (Your Money with Kent Smetters on Bloomberg Business Radio). Unfortunately, the presentation is two hours long. That’s probably more time than you want to devote to this admittedly dry subject.

So, I’ve saved you the trouble! Here’s a quick summary, posed as puncturing misconceptions.

1. Disability is really unusual – I don’t have to worry about it. A 35 year-old man has a 27% chance of incurring a long-term disability during the course of his career. For a 35 year-old woman the risk is even higher at 31%.

2. Disability insurance is too expensive. Not having disability insurance can be even more expensive. For example, if you suffer from a long-term disability beginning at age 35, depending on your annual income, your lost income can easily exceed a million dollars. Furthermore, your potential retirement savings could take a hit of approximately 60% – you might face an early retirement with woefully inadequate resources.

Group disability insurance is often the most affordable option. Many employers offer plans, either employer-paid or employee-paid. Such plans are often “guaranteed issue,” so that you won’t have to answer health history questions. If your employer doesn’t offer group disability insurance, or you don’t think the coverage is sufficient, you should consider an individual disability insurance policy. You usually have the option to customize a plan based on your personal circumstances, which can keep costs down.

3. Social Security Disability Insurance (SSDI) and workers’ compensation will cover any disability I might develop. Unfortunately, SSDI doesn’t cover all disabilities. Furthermore, when SSDI does cover a disability, the disabled individual often receives only a small fraction of pre-disability income. Workers’ compensation does not cover most disabilities and is often cause-specific.

4. I’m healthy, so I don’t need disability insurance. While you may feel healthy now, disability is unpredictable. Illness accounts for 90% of new disability claims. Accidents represent the balance. Becoming disabled can happen to anyone at any time.

5. I have life insurance and health insurance, so I have all the insurance I need. Many individuals understand the combination of life insurance and health insurance as full insurance coverage. Life insurance provides a safety net for your family in case of a tragedy. Health insurance covers your cost of care if you are sick. Neither one covers your loss of income if you’re disabled. Disability insurance can help fill this gap and bring you a better sense of security in the case of any unexpected circumstance.

The unfortunate reality is that many individuals, while financially savvy in other aspects of life, neglect to protect themselves with disability insurance. You should work with a trustworthy insurance professional to advise you about your disability insurance needs. In general, however, we can say that the best disability insurance coverage will provide you with a high replacement of after-tax income for your working life if you are disabled, and protect you with a generous definition of disability.