I'll bet that there are a lot of things you rarely think about and perhaps never want to -- maybe, for example, toenail fungus, the naked mole rat, IRS Publication 2105 (titled "Why Do I Have to Pay Taxes?"), and Britney Spears. I'll also bet that disability insurance is in that group.
And why wouldn't it be? The concept of insurance alone is seemingly boring enough. Focusing on the disability nook of it won't make your heart beat faster. (Though, to be fair, insurance, like taxes, is actually less excruciatingly mind-numbing than you probably think. To learn more, read Peter Bernstein's highly regarded book, Against the Gods: The Remarkable Story of Risk.)
Most of us need disability insurance, yet less than 15% of us have it. Yikes. Take a few minutes to keep reading and you might thank yourself some years from now.
What it is
Disability insurance is meant to protect one of your most important assets: your income stream. We routinely insure other assets, such as our homes, our cars, our lives, and our health, but when it comes to our income from work, we seem to just assume it will always be available.
A common misunderstanding many people have is that disability insurance is for accidents. Yes, it can protect you if you experience a work interruption due to an accident. But there are many other kinds of disabilities, the most common type being disease. Cancer, diabetes, heart disease, a stroke, even a pregnancy (not that we're calling reproduction a "disease") -- these kinds of developments have the power to put you out of commission for quite a while. You might have a non-strenuous office job, but back pains or side effects from medications might prevent you from being able to sit and/or concentrate.
Typically, disability insurance will pay you somewhere between 50% and 70% of your current income. Don't expect to find a policy that will pay you more than you currently earn -- insurers don't want to decrease your motivation to return to work.
Why you need it
Still not convinced? Then check out these sobering statistics:
- Roughly half of all foreclosures in America are due to disabilities. Roughly a quarter of all bankruptcies are tied to an illness or injury. As financial advisor and author Ric Edelman has pointed out, there's an approximately 1-in-1,200 chance that your home will burn down, yet you probably have homeowner's insurance.
- Every year, some 12% of adult Americans (about one in eight people) will suffer a long-term disability.
- About 30% of Americans ages 35 to 65 will suffer a disability lasting at least 90 days sometime during their careers, according to the Health Insurance Association of America. That's close to a one-in-three chance for you and me. (Unless you're an 11-year-old Ukrainian or a 74-year-old Pakistani, of course.)
- If you're thinking about Social Security and how it has provisions for disability protection, think again. It's very hard to qualify for this, and at least 70% of applicants are turned down on their initial claim. (They typically have to hire lawyers to make their case.)
Got the picture? This isn't one of those remote possibilities, like winning a lottery. It's very common. And when it hits, you may find yourself suddenly wondering how you're going to pay your mortgage and put your kids through school. (On the bright side, lest you find yourself getting depressed right now, know that the average disability lasts a little over a year -- in most cases, it's not a lifetime thing.)
Why you might not need it
There are some folks who don't need disability insurance. You'd qualify if, for example, you have plenty of money and can take care of yourself and your obligations should some tragedy occur. Also, your employer might provide sufficient disability insurance. But remember that people change jobs frequently these days, and you probably won't be taking this insurance with you when you pack up your desk. Plus, it can get more costly as you get older. Finally, keep in mind that employer-based disability benefits are taxable, so you won't be keeping as much as you think.
What to look for
There are many factors and features to consider when you're signing up for disability insurance. Here are just a few:
- Make sure the company you sign up with is healthy. You don't want it to go belly-up, taking with it the protection you've invested in. Some firms offering disability insurance include UnumProvident
(NYSE:UNM), MetLife (NYSE:MET), CIGNA (NYSE:CI), Hartford Financial's (NYSE:HIG)Hartford Life, StanCorp Financial's (NYSE:SFG)Standard Insurance, Prudential (NYSE:PRU), Aetna (NYSE:AET), and a bunch of private mutual companies, such as Liberty Mutual, Northwestern Mutual, MassMutual, Guardian Life, and New York Life. You can check out their ratings at the A. M. Best website. Look for high ratings, ideally A++ or A+.
- Consider getting "own occupation" coverage, which defines your disability as one where you cannot work in your own occupation. Without this kind of coverage, if you suddenly can't be a plumber anymore, the insurance company might argue that you can still find other work, such as teaching high school shop or even answering phones.
- Look for inflation protection. Without it, the $2,000 per month that you're signing up for may not do too much for you in a decade or two.
- Consider extending the waiting period before your benefits would begin being paid. The longer the waiting period, the lower your premiums. If you have enough cash to carry you for six months, this could be well worth it. (This is just another reason to have an emergency fund.)
- Look for policies that are "non-cancelable" (meaning the firm can't change anything about the policy, including increasing the premium or reducing the benefit).
- Be clear on the benefit period. Different policies will pay you for anywhere from six months to life. You want to be paid until you reach retirement age, at least.
- Consider a rider that accommodates you if you can only work part-time due to your disability. It may then pro-rate your benefit.
- Find out if you can buy additional insurance in the future, increasing the amount for which you're covered.
- You might be able to get an "income replacement" feature, that will pay you (at least for a while) the difference between your old and new salary, if you end up taking a lower-paying job.
If you spend some time reading articles about disability insurance, you'll likely run across many tales of disabled people who ended up having to fight their insurance companies to receive their due. These are generally true stories. Many people have indeed had to fight, and some have gone to court and won major awards from juries.
Still, the news isn't all bad. A Kiplinger's magazine article relayed comments from Jim Sabourin, vice president for corporate communications at UnumProvident. According to Sabourin, in 2002 "the company processed over 420,000 disability claims and paid $3.7 billion in benefits. Only about 3% of claimants appealed the company's decisions, and less than one-half of 1%, or about 2,000 people, ended up in litigation." So you may end up fighting your insurer, but it's not the most likely outcome.
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Selena Maranjian is relieved to have disability insurance. And even more relieved that she hasn't had to use it. She doesn't own any stock in companies mentioned in this article. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.