Works If You Can’t

BE HONEST: WHEN WAS the last time you thought about disability insurance? As co-founder of a website that sells insurance, it’s a topic I think about every day, but I realize most folks have other things on their mind. Yet becoming disabled is one of the biggest financial risks that working people face.

Disability can result from accidents or sickness and can impact people of all ages. According to the Social Security Administration, a 20-year-old entering the workforce has a one-in-four chance of becoming disabled for a year or more before retirement. That’s four times the probability of death, plus the financial consequences are far worse. After all, you’re still alive—which means you still have living expenses. When you become disabled, you not only lose your earning potential, but also you likely face steep medical and other bills.

Long-term disability insurance helps protect workers from this risk. But in the U.S., only a third of workers have coverage. The good news is, if you work at a larger company or have an office job, you’re much more likely to have coverage. The bad news is, your coverage may still not be enough. Most group coverage—that is, coverage you get through work—has percentage and dollar caps on benefits.

For instance, if you become disabled, you might receive 60% of your income up to a maximum $5,000 per month. Let’s say you make more than $100,000 per year. The $5,000 per month cap means you’re protecting less than 60% of your income, plus your group disability benefits would be taxable. If you aren’t careful, you can quickly get into a situation where disability benefits are not enough to cover your living expenses, let alone medical bills, retirement savings, college savings and other important financial goals.

Think Social Security’s disability program will protect you? Unfortunately, that’s unlikely. Social Security requires you not only to have a disability that’s expected to last more than a year, but also the disability must prevent you from all work. If you’re able to work just a few hours a week or you’re expected to recover within 12 months, you don’t qualify. In addition, benefits are limited: $1,170 was the average monthly benefit paid in 2017. Finally, even if you do qualify, it could take a year or more to get approved. More than half of applicants get denied.

So how do you protect yourself? An individual disability policy can help. But you might be surprised that—even though my site sells individual policies—I recommend them as a last resort, because individual policies are relatively expensive and they’re one of the more complicated insurance products. They also take six to eight weeks to get, because insurers must underwrite both your health and financial situation. Before you go down that route, consider the following four steps:

• Understand your work coverage. How is disability defined? What benefits do you receive and for how long? If you were to become disabled, would the benefits be enough to live on, especially after figuring in taxes? If your work coverage is enough, you probably don’t need to look elsewhere.
• Explore buying additional group coverage through work. Some companies pay for 60% income coverage but allow employees to pay a small amount to bump that up to 66.7% or 70%. If this is available, it’s a great option, because it’s relatively affordable and usually doesn’t require medical underwriting.
• Explore buying individual coverage through work. Some employers negotiate deals with insurers, so employees can purchase individual disability policies at a discount. Because of group buying power and the fact that insurers can aggregate a potentially large pool of customers, these policies will often be cheaper than buying a policy on your own. In some cases, the insurer even simplifies the underwriting process, so no medical exams are required. The great part about these policies is you can take them with you if you change employers, which is not the case with your group coverage.
• Explore affinity group discounts. If you belong to an affinity group—such as an association for lawyers or accountants—see if your group offers disability insurance at a discount. If not, ask if the group is open to adding a discount program. Many insurers will offer a discount of 5% to 15% on individual disability insurance if you can get the affinity group on the insurance company’s “approved” list. The main requirement is that the affinity group needs a couple of years of history and cannot be set up solely for the purpose of buying insurance. You’ll likely need someone from the affinity group to provide information to the insurer, but it should be a simple process.

Assuming you don’t have any long-term disability insurance coverage, or you have insufficient coverage and can’t get more from the above sources, you likely need an individual policy. In a future post, I’ll cover the ins and outs of how these policies work and how to select the right one for you.

Dennis Ho is a life actuary and chief executive of Saturday Insurance, a digital insurance advisor that helps people shop for income annuities, long-term-care insurance and other insurance products. Prior to co-founding Saturday, Dennis spent 20 years in the insurance industry in a variety of actuarial, finance and business roles. His previous article was Bet Your Life. Dennis can be reached at dennis@saturdayinsurance.com or via LinkedIn.

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