16
Disability Insurance
A twenty-year-old worker stands a nearly three in ten chance of becoming disabled before age sixty-five.
Social Security Administration
In addition to having health and automobile coverage, most people insure their lives so that in the event of their untimely demise—a term that for me always begs the question, Is there such a thing as a timely demise?—those who depend on their income will not be left high and dry.
Term life insurance, the insurance of choice for debt-proof living, is relatively cheap because so many people who pay for it never use it. The insurance companies invest all those premiums, make an obscene fortune doing so, and end up paying out far less than they take in.
Curiously, less than 15 percent of people who buy life insurance insure something far more important: their ability to earn a living. Face it, folks, these days, with medical technology what it is, the odds increase every day that a disease or accident that would have killed you even a decade ago will now leave you disabled—alive but unable to work.
Please do not take the absence of detailed information on other types of insurance as an indication that they are not necessary. They are. Due to space limitations, I am not going to address automobile, health, life, and homeowners/renters insurance in this book. But I do want to discuss disability insurance because of all the types of insurance that exist, this is the one you are most likely to overlook yet need the most. Failure to have it could wipe you out financially.
Your chances of becoming disabled at a relatively young age, either temporarily or permanently, are far greater than your chances of dying young. Some would argue (and I would be one) that if you cannot afford both life and disability insurance, you should decide in favor of the latter.
The debt-proof living philosophy relies heavily on being prepared for the unforeseen. That’s the reason for my emphasis on a Contingency Fund, a Freedom Account, and living without debt. However, none of these provisions is going to carry you through for long periods without an income.
Just over 1 in 4 of today’s 20-year-olds will become disabled before they retire.1 Over 37 million Americans are classified as disabled; about 12 percent of the total population. More than 50 percent of those disabled Americans are in their working years, from 18–64.2 And while most working Americans have access to Social Security Disability Insurance, it’s not something we should count on receiving long term. Sixty-five percent of initial SSDI claim applications were denied in 2012.3 Even if you were to be granted this type of financial assistance during a season of disability, can your family live on $1,130 a month? That’s the average monthly benefit paid by Social Security Disability Insurance (SSDI) at the end of 2012.4
Why Is It So Expensive?
Disability insurance is far more expensive than term life insurance. In fact, it rivals the more expensive whole life insurance but does not offer the dubious advantage of cash values. No wonder so many people overlook this most important type of insurance.
Disability insurance is expensive because there’s a much higher probability you will use it. Insurance companies operate on levels of risk. The greater the chances they will have to make payment on a claim, the higher the premiums.
With life insurance, most people underestimate their life span, so they end up buying insurance they will never use. Or they buy ridiculously expensive insurance such as whole life or universal life and then drop it the minute they go through a financial downturn. That’s why insurance companies make out like bandits.
But when it comes to disabilities, people of all ages have equal risks, which means it is more likely that you will need disability insurance at some time during your earning years. If you are in a two-breadwinner household, it is likely you need disability insurance more than life insurance, given how expensive it can be to care for a disabled person. Disability insurance is not, in my opinion, the luxury item most people consider it to be.
How It Works
Standard disability insurance is straightforward. If you are disabled and unable to work as defined by the disability insurance policy, the insurance company replaces a specific percentage of the income you would have earned had you not been disabled. In the same way that health, auto, and life insurance policies have unique provisions, exclusions, and stipulations, a disability policy has all kinds of provisions that you should consider carefully. Generally speaking, the lower the premium, the greater the number of exclusions and stipulations. Consider them carefully, and never buy insurance coverage you do not fully understand.
What to Look For
A disability insurance policy is not a simple document to decipher. However, if you go over one with the following checklist in hand, you should not have trouble deciding if a policy is right for you.
Simple definition. You want a policy that defines disability very simply: a decline in income as a result of sickness or accident. A policy that gets complicated in this regard will likely be difficult to nail down when it’s time to file a claim.
Guaranteed and noncancelable. This type of policy will have a fixed premium and will stay in effect as long as your payments are current regardless of health issues or other variables. Just as the policy states, you have guaranteed coverage and it cannot be canceled. Avoid a policy that carries a provision that states it is “class cancelable.” That means a policy can be canceled if an entire class of policies is canceled. If a company were to cancel an entire class of occupations, say truck drivers, and you were one of them, you’d be out in the cold even if your policy was guaranteed and noncancelable.
Addresses preexisting conditions. Make sure your policy covers disabilities resulting from preexisting conditions that you disclosed at the time of application. If you had a disabling back condition twenty years ago and have since recovered, you don’t want to find out a new back condition is not covered because of that preexisting situation. Make sure that if you have preexisting conditions they are clearly stated and the terms under which they will be covered are spelled out.
Waives premiums during disability period. You want to find a policy that waives the premium completely if you are disabled for more than, say, ninety days. That means that if you are disabled, your insurance provisions stay in full effect but you do not pay those expensive premiums.
Insures for your occupation. You want a disability policy that protects you against your inability to work in your own occupation. Without this important provision, your insurer will not pay you unless you can’t work at all.
Payment increases. You want a rider on your policy that provides for payment increases to keep up with inflation and your income. If you bought the policy when you made $25,000 and make $45,000 when you suffer a disability, you want to make sure you are covered at the $45,000 level.
Pays until retirement. Some disability policies pay for only a specific period of time, such as five or ten years. The best policy is open-ended and continues as long as you are disabled until retirement age.
Option to purchase. If your policy includes an option to purchase clause, you will be able to increase your coverage at predetermined times regardless of your health or other factors. This is a good protection that will allow you to adjust your coverage in the event the economy experiences hyperinflation. There are riders that automatically adjust policies upward to allow for inflation, but they are very expensive. The option to purchase clause is a reasonable substitute.
How Much Coverage
I could suggest you look for a policy that would pay 100 percent of your income—and you would look forever and never find it. Disability policies pay a percentage of your current income or an average based on some stated period of time. Of course, the lower the percentage, the cheaper the premium, so it is important that you determine your absolute minimum requirement in the event you are unable to earn a living.
Your regular expenses will be reduced somewhat during a disability period simply because you won’t be going to work every day. Figure how little you could get by on and then start looking for a policy that will meet that portion of your income.
Reduce the Cost
One thing you can do to reduce the high cost of disability insurance is to accept a longer waiting period or elimination period. Some policies kick in, or begin paying benefits, immediately upon a disabling event. Others have a 30-, 60-, 90-, or even 180-day waiting period. It is advisable to take the longer waiting period, resulting in a significantly lower premium, and then look to your Contingency Fund or other nest egg to cover the bills during the waiting period.
Where to Look
Even if you feel you are not in a position to take on another expense at this time, start thinking about it. I hope that soon you see this as a priority you can no longer ignore. At the very least, find out what a good disability policy would cost. Ask friends or relatives for a referral to an agent or disability insurance carrier.
The most logical place to look for disability insurance is right in your own neighborhood, so to speak. Ask if your employer offers this as a group benefit. Some employers provide a small amount of coverage as an employee benefit and allow employees to purchase more at their own expense. A call to your human resources department might turn up a very nice surprise, since group coverage of any type of insurance is always much cheaper than an individual policy.
If your employer doesn’t offer this benefit, find out if any trade organizations to which you belong—or would if you were convinced they offered you something of benefit—have group disability insurance. Ask your friends, both personal and professional, if they might have a recommendation.
If all else fails, start looking at individual coverage. Your current life insurance provider may also offer disability insurance, so make that call without making any commitments. Remember, you are only shopping at this point.
Finally, if you can prove a connection to the military, you can get disability insurance through USAA with reasonable premiums. From its founding, USAA has been devoted to offering financial and insurance services to individuals and families in the United States military. While its banking services have been opened to the public, its insurance arm remains restricted and available only to people who can prove a connection. That means if your father served, most likely you and your immediate family members are eligible. You can check USAA.com for more specific information on this issue or call USAA Life Insurance Company at 800-531-8000 for a price quote. The fact that they have no agents helps to lower the premiums.