Disability insurance can save family finances

What would you say is your most valuable financial asset: your house, your car, your retirement account?

For most people of working age, the answer isn’t in their golden eggs but in the goose that laid them: Their most valuable asset is their ability to earn money.

That’s why one of the most financially devastating events that could befall a household is when a breadwinner becomes disabled for an extended period and can’t earn any more money. That applies to all workers, not just those approaching retirement. And it’s especially true for Americans living paycheck to paycheck with no savings to rely on.

So personal finance experts and consumer advocates try to hammer home the importance of long-term disability insurance, which pays a portion of your income if you’re disabled either through illness or injury.

Just more than 1 in 4 of today’s 20-year-olds will become disabled before age 67, according to the Social Security Administration.

Although many people carry life insurance, you’re three times more likely to become disabled for a year before age 65 than die, according to a recent report by Sun Life Financial.

“Every consumer is vulnerable,” said Stephen Brobeck, executive director of the Consumer Federation of America, which advocates that more employers offer group disability insurance and the government offer tax incentives to small businesses to help them afford to offer it. “The probability of being out for an extended period of time applies to all Americans.

“This is coverage that should be part of everyone’s basic financial plan.”

The good news is that if you work for a relatively large company, you probably have disability insurance and your employer pays for some or all of it. But all told, only three in 10 American employees have it.

Here are a few basics.

• What it is: Long-term disability insurance refers to payments you receive after being out of work, typically for three months or longer, with a disability. Payments are often equal to 60 percent of income, which isn’t full replacement of income but can help many households get by. You typically can’t get full income replacement because insurers want you to have an incentive to go back to work when you are well. It’s usually worthwhile to pay extra through an employer to get more salary replacement – say, 70 percent – if you have the option, experts say. Be aware that most disability policies do not replace income from nonsalary sources, such as sales commissions or bonuses at work. Those with incomes in the six figures often won’t be able to get 60 percent income replacement and can hope for perhaps half or less.

• What it’s not: Disability insurance is not about getting paid after being injured on the job. That’s workers’ compensation. The vast majority of injuries and illnesses causing work loss are suffered away from work. Social Security Disability Insurance is different, too. It might provide a source of income, but it is difficult to qualify for. And payments average only about $13,000 a year, according to the Consumer Federation. “You really have to be a basket case to collect under Social Security,” said Matt Tassey, a disability insurance broker in Portland, Maine.

A different kind of insurance is short-term disability, or what many employers call sick leave. That’s a different product, covering lost earnings for a shorter time, such as being out up to a year. And disability insurance is not about paying medical bills if you’re disabled. That’s health insurance.

• Who needs it: Working people, especially singles or breadwinners in single-income households.

• Where to get it: The easiest and least expensive way to get coverage is through an employer’s group plan. “The best place to get both the information and the highest value coverage is probably in the workplace,” Brobeck said. If your employer doesn’t offer it, try trade or professional associations or small-business organizations you belong to, Tassey said. Sometimes you can get it through a bank or credit union in association with a loan you have with that institution, he said. Failing those options, you can buy an individual policy, often through a broker. One advantage of an individual policy is that payments are not taxable.

• How much it costs: With disability insurance through an employer, monthly premiums usually range between $10 and $30, according to the Consumer Federation. Employers often choose to pay all or a portion of those premiums. When buying insurance on your own, it can be more expensive, probably 2 to 3 percent of income. So for many, it might cost in the neighborhood of $2,000 a year. That’s a lot of money, but it’s all in how you think about it, suggested Byron Udell, CEO of online broker AccuQuote.com, which sells disability insurance. Which job would you rather have: one that pays $80,000 when you’re well and zero if you’re sick or hurt, or one that pays $78,000 if you’re well and $53,000 if you’re sick or hurt?

• What to look for: Disability policies vary and can be somewhat confusing, but pay special attention to a few policy features besides price. How long after you become disabled do payments kick in, or what’s the so-called elimination period? It’s akin to a deductible with other insurance. If you have substantial savings, you can elect a longer elimination period and pay less for disability insurance. But the best value is a waiting period of 90 days, Udell said.

Once you start receiving payments, how long will they keep coming? Are you covered for two years, five years or until you’re age 65? Longer coverage is more expensive.

What is the definition of disabled? Does the policy cover you if you can’t work at your own occupation or work in any occupation? That’s a big difference, with the preferable choice being your own occupation. A disability might prevent a trial lawyer from doing her job but not from bagging groceries at the supermarket. Other disability definitions lie between being unable to perform your “own occupation” versus “any occupation.”

“How long do I wait, how long does it pay and what do I have to do to be disabled?” Tassey said in summing up the primary considerations besides price.

The takeaway? If you’re working and can get disability insurance through your employer, buy all you can. If your employer

doesn’t offer it, consider buying individual coverage, using a broker who can help you sort through the options, experts say.

Tags: business, money