Do You Have Insurance for Your Income?

I’ve recently mentioned disability insurance in a couple of posts, “Its a Scary Time of Year – Open Enrollment” and “Risk May Be Unavoidable, But It Doesn’t Have To Be Unmanageable“. However, its such an important topic that I thought it warranted digging into a little deeper.

Disability insurance provides income replacement if you are unable to work due to an accident or illness. It comes in two forms; short-term disability and long-term disability. Short-term disability insurance covers absenses of between 60 and 180 days and can pay as much as 80% of your gross salary. Long-term disability insurance picks up where short-term disability leaves off, and can provide benefits for years, depending on the policy and the nature of the disability. Long-term disability will typically replace about 60% of your salary. Many employers offer both forms of disability insurance. Often times employees will be automatically enrolled in short-term disability coverage, frequently at no cost to the employee. However, long-term disability insurance is generally a voluntary benefit, requiring the employee to pay for much of the premium, and many employees skip the coverage to save money. Less than one in three private sector workers is covered by long-term disability insurance.

In a survey, two thirds of respondents indicated that they would not be able to cover an unexpected expense of more than $500 with their current savings. That means that going without a paycheck for any extended time could be financially devastating to a family. Yet most people underestimate their chances of requiring an extended leave from work due to illness or injury. According to the Council for Disability Awareness, if you are an average 35 year old woman in good health and working in an office job, you have a one in four chance of becoming disabled for more than three months, and if that is you, you’ll have a 38% chance of being disabled for more than five years. For men, the chances of a disability lasting more than three months is one in five. You are more than twice as likely to have a disability than you are to file a claim against your homeowner’s insurance.

How will you pay your bills if this happens? Your rent or mortgage has to be paid on time every month. You need to heat your home and buy groceries. If you are like most Americans you have other outstanding debt like car loans and credit card balances that also need to be paid. If you are sick or injured for an extended time, you will have new medical bills to worry about as well. A Harvard Law School study found that nearly two thirds of bankruptcy cases were linked to medical causes. Forty percent of all individuals filing bankruptcy in the study had lost income due to illness or injury.

You may be thinking that you would be eligible for other support, such as workers compensation insurance or Social Security Disability Insurance. Only 5% of disabling illnesses or accidents are work related, which means that 95% would not be covered by workers compensation insurance. Social Security Disability Insurance, like the retirement benefit, is based on your average earnings. If you are our thirty five year old and making $60,000 per year, you could be eligible for as much as $1,800 per month, which is about one third of what you are currently making (the average benefit is $1,165). Will you be able to live on that much less income?

If long-term disability insurance isn’t available through your employer, you can buy an individual policy. You can expect to pay between 1% and 3% of your annual salary. If your employer offers the coverage it will likely cost less. Even at individual policy prices, the expense is well worth it given what you can expect to lose if you do become disabled. Your greatest asset is your ability to earn a living. Protect your family’s well being and insure your income from the disaster of a long-term disability.

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