May is Disability Insurance Awareness Month. It exists to address a very real problem: Many people don't know about disability insurance (also known as income protection or paycheck protection). Yet, for most people, the odds of becoming disabled at some point, and unable to earn a living, are surprisingly high. In fact, many financial experts believe that disability insurance is the most important type of insurance to have, because without your income, all other assets and financial plans are at risk.
One in four Americans will lose income due to long-term disability
According to Life Happens, a nonprofit organization whose mission is to inspire people to take financial responsibility through relevant insurance products, disability insurance is the most overlooked major insurance type. "That’s likely because many people think a disabling illness or injury will never happen to them," the nonprofit said.
Unfortunately, that's wishful thinking. DisabilityCanHappen.org offered the following statistics:
- More than 1 in 4 of those who are 20 years old today will experience disability before they retire.
- A typical 35-year-old who’s in good health has a 21-24 percent chance of being disabled for three months or longer during their career.
- The average disability for a person like this lasts 6.8 years.
Is disability insurance really necessary?
For anyone who is not independently wealthy, and relies on a paycheck to fund living expenses, the answer is YES – disability insurance is needed. Stop to think for a moment. If you had a stroke and temporarily lost your ability to speak, drive and think clearly, what would you do? While you were off work recovering, how would you pay the bills?
If you’re one of the few Americans who still have employer-provided long-term disability (LTD) insurance, you at least have something – roughly 60% of your income, which may have a cap, like “up to $500 a week.” Let’s say you make $75,000 a year, roughly equivalent to $1,442 per week and your work LTD policy pays a 60% benefit with no cap. You would receive roughly $865 a week. Here’s the catch: You have to pay taxes on employer-provided benefits, so take 25% right off the top, and you’re down to a weekly income of roughly $649. That might be tight, but if you have a capped benefit, the situation is even worse. For example, if you were limited to a benefit of $500 per week less taxes, you’d be left trying to live on $375 per week.
Even worse, if you are among the majority, and you don’t have any work-sponsored LTD, you’re forced to rely on your savings. To financially survive, you may need to downsize your home, stop saving for retirement and college, and liquidate your existing savings and investments. This is especially true if your disability lasts for the average duration – 6.8 years.
The solution: Individual disability insurance
There are huge advantages to owning your own individual disability insurance policy. To start, the policy benefit is not taxed, so it stretches farther. You can customize the policy to meet your unique needs and budget. And, individual policies are portable, so they follow you from job to job.
If you’re an employer, tell your team about the risk of disability, using tools and resources available here. When your group benefits enrollment period comes around, add disability insurance to the voluntary benefits lineup – even if you already offer employees a group long-term disability plan. Make sure employees know that it’s a good idea to own a separate individual disability insurance policy to round out the employer-paid LTD benefit.
Also, keep in mind that LTD benefits that are capped may reverse discriminate against highly paid employees providing a benefit that is a very low percentage of their pay. For those people, ask us about carving out an executive benefits multi-life plan.
Also, business owners should keep their own protection needs in mind. For businesses, we offer key person DI plans, buy-sell DI plans, and business overhead expense policies, so that if something happens to you (or another key player), your business can still survive and thrive. Contact our financial services team to learn more.