Most Americans Need to Prepare for
Financial Impact of Disability
Most
Americans are not prepared to deal with the possibility of becoming disabled
due to sickness or injury and leaving the workforce for an extended period of
time. In fact, more than half of
And the
possibility of becoming disabled and unable to return to work is quite high for
many Americans. One-fifth of this
nation's population will actually become disabled for a year or more before
reaching age 65, according to the Social Security Administration (SSA). The most common causes of long-term
disability are heart disease, back injuries and cancer, followed by stress,
anxiety and depression according to the U.S. Department of Education and the
National Institute on Disability and Rehabilitation. By contrast, slightly more than one in 10
Americans surveyed by NAIC say that it is somewhat or very likely they would
become disabled and unable to work.
These
findings, according to the NAIC and financial planners, underscore the need for
long-term disability insurance. Nearly
half of Americans do have long-term disability insurance, but much of it is
employer provided rather than individually purchased. And that means, according to the NAIC, that a
significant number of people could lose their coverage in the event of a change
in employment status.
So what
then is disability insurance? Disability
insurance is insurance designed to protect people financially by replacing some
of their lost income. The two main types
of disability insurance are short-term and long-term. Short-term disability insurance, which some
states require employers to carry for their employees, replaces a portion of
the policyholder's salary for a short-period - typically from three to six
months following a disability, according to NAIC.
Long-term disability
insurance coverage typically begins after the policyholder is disabled and
unable to work for at least six months, according to NAIC. The coverage period can extend for a specific
number of years or until the policyholder retires or turns 65, depending on the
policy selected and the type of disability.
For
insurance purposes, disability is typically defined as the inability to work
due to an illness or injury, according to the NAIC. Of note, the insurer’s definition of
disability is a key factor in how one should shop for a policy.
So what
should Americans consider when evaluating disability insurance? Below are tips from the NAIC and financial
planners:
First,
determine how much money you'll need to cover all of your critical expenses
(such as housing, food, utilities and transportation) should you become
disabled. Generally, you should consider
buying long-term disability insurance that covers about 60 percent of your
annual income.
Those who
have a pre-existing health condition, such as a back problem or heart ailment,
may have to purchase a policy with an “exclusion” rider. If the disabled person can provide
documentation that the pre-existing condition has improved, the insurer may
remove the rider after a specified time period.
Your
occupation is crucial in obtaining coverage.
If possible, depending on your occupation, you want to get an “own
occupation” definition.
Typically,
younger, healthier individuals pay lower disability premiums. If you purchase disability insurance at a young
age and can get a "non-cancelable" policy, your coverage can't be
cancelled and the premiums can't be raised once your medical exam has been
approved and your policy issued, assuming your premiums are paid on time. Also, consider buying an option to increase
your coverage without additional medical underwriting if you’re young or if you
expect your earning power to increase.
While a
"guaranteed renewable" policy can't be cancelled, its premiums may be
increased on the anniversary of the policy or when stated in the policy.
Most
long-term disability insurance stipulates a waiting period, such as 90 days
(the most comment), 180 days or one year before benefits are paid. Disability insurance also stipulates a
benefit period; for example, one year, two years, five years or until age 65.
Most
companies offer policies that are offset by any benefits paid from Social
Security. While receiving a benefit from
Social Security is not likely, this is a way to reduce the cost of the
disability policy.
The federal
government does offer long-term disability benefits through the Social Security
Administration under the following specific circumstances: "…if you cannot
do work that you did before and we decide that you cannot adjust to other work
because of your medical condition(s).
Your disability must also last or be expected to last for at least one
year or to result in death." And
you must be disabled for at least 5 months.
SSA disability is an “any” occupation definition of disability.
Before
purchasing any disability policy, consumers should check with their state
insurance department to make sure the company offering the coverage is
legitimate, solvent and authorized to do business in their state. They should also evaluate the financial
strength of the company and whether there are any complaints filed about their
claims-handling experience.
This column is produced by the
Financial Planning Association, the membership organization for the financial
planning community, and is provided by Anneliese D’Souza, CFP®, a local member
of FPA