How is Cost of Disability Insurance Determined

Few people question the need for health and life insurance, but disability insurance seems to fall in a different category. Maybe we make sure we have health and life insurance coverage because we all know that we are going to need it at some time, but we discount the very real risk of serious disability during our working years as something that happens only to someone else.

That’s a serious mistake, one that ignores the sobering statistics about disability and places millions of American families in financial jeopardy. Statistics compiled by The Council for Disability Awareness show, for instance, that:

• In May 2006, the US. Census Bureau classified more than 51 million Americans as disabled;
• In its 2007 Fact Sheet, the Social Security Administration anticipated that three of every 10 20-year olds entering the workforce would become disabled before they retire at the age of 67, and that almost half of the more than 6.8 million workers who receive Social Security Disability benefits are under the age of 50;
• The National Safety Council reports that a disabling injury occurs every two seconds and that more than 90% of disabling accidents and illnesses are not work related.

Disability, whether from accident or illness, often keeps a person out of work, yet the ability to work, and earn an income, is one’s most valuable asset, far more important than any house, car, or other possession. An estimated two-thirds of American families live from paycheck to paycheck and the current average savings rate is the lowest since the Great Depression of the 30s. That means few Americans can afford to become disabled.

Statistics also show that most Americans are not prepared for the financial realities of disability.

• The Social Security Administration reported in 2007 that 70% of private sector employees had no disability income insurance;
• The Council for Disability Awareness found that more than 100 million workers do not have private disability insurance;
• And, of the 2.1 million workers who applied for Social Security Disability Income benefits in 2005, only 39% were approved. Their average monthly disability benefit was $978.

Such statistics show that a serious illness or injury can harm more than your health: It can affect your ability to work, and with it your earning power. If you have no income, eventually your assets begin to dwindle as you cash them in to meet day-to-day living expenses. Meanwhile, the cause of your disability may require special assistance, equipment, and treatment. In that case, your expenses may increase ”” right at the time when you can least afford it.

Your income actually does a double job by providing today’s basic necessities and luxuries and building a foundation for your future, for the growth of a business, college, vacations, retirement. If you suddenly become totally disabled and unable to earn, your income stops abruptly ”” if you have no insurance benefits.

II. WHAT TO DO

You can protect yourself against this risk by making sure you have sufficient insurance protection to cover all, or most, of your lost income. Insurance is an ongoing expense, one that doesn’t pay off unless you become disabled, so, you need to understand your risk of becoming disabled.

III. UNDERSTANDING THE RISK

Death is one of the two threats to your ability to earn income. Disability is the other. Despite the significant risk of disability, though, most people buy life insurance but hesitate to buy disability income insurance, even though the financial cost to your family may be greater if you are disabled than it would be if you had died.

Data in the Disability Income Table prepared by the Society of Actuaries and Commissioners documents that at every age from 25 through 60, you are far more likely to become disabled than to die. For example, at age 25 the risk of death is 24.1 % and the risk of disability is 34.8%. By 35, the risks are 22.8% and 31.3%, at 45, 20.4% and 26.3%, at 55, 14.9% and 17.6%, and by 60, 9.3% and 10.6%

The Disability Income Table also shows that you are more likely to suffer a disability before age 65 than you are to have an automobile accident, die or have a fire in your home, and that the odds of long term disability increase as you age, especially as advances in medical technology improve your chances of surviving an illness or accident. Many once fatal diseases now only mean a period of long-term disability as you recover from treatment. Cancer is a perfect example. With improved treatment, more people survive, but most of them are not able to work during treatment. Heart attacks used to kill a much larger percentage of the population than they do now, but after heart surgery most people need time away from work to recuperate.

The Disability Income Table also provides data on the individual risk of suffering a long-term disability. The following two charts should convince even those who believe themselves to be invincible that it would be foolish to go without disability income insurance–unless you are extremely wealthy and have no need to work.

This table shows the percentage of people who can expect to be disabled for 90 days or more between the age shown and age 65.

AGE	PERCENTAGE
25	52%
30	51%
35	48%
40	45%
45	40%
50	34%
55	27%
60	16%

And this 1998 Table show that if a disability lasts two years, it will probably last much longer.

AGE WHEN DISABLED for 90 DAYS	% STILL DISABLED AFTER 2 YEARS AND 90 DAYS	% DISABLED AFTER 5 YEARS
25	63.5%	44.2%
35	69.7%	52.6%
45	73.6%	58.0%
55	77.6%	59.6%

All these statistics should reinforce the message that you may very well need some type of disability insurance during your working years.

Despite the common misperception that accidents account for most disability, data from the National Institute on Disability and Rehabilitation Research (1992) show that only 13% of disabilities are due to injury In fact, disability due to illness is far more common and illness does not discriminate. Illness disables computer programmers, engineers, physicians, plumbers, and everyone else alike. The following chart, based on disability insurance claims, identifies some of the conditions that may lead to disability.

IMPAIRMENT	TOTAL PERCENTAGE OF DISABILITY CLAIMS
Back/Spine	18.2%
Psychiatric & Emotional	12.7%
Neurological	11.3%
Extremities	9.0%
Cardiovascular	4.1%
Diabetes	3.6%
Substance Abuse	3.3%
Hearing	2.9%
Vision	2.6%
Blood Disorders	2.6%
Cancer	2.3%
Asthma	1.7%
Other	25.7%

Source: HIAA Source Book of Health Insurance Data 1999-2000

IV. THE LOSS

What would happen if your income suddenly stopped? How would you pay your bills, your mortgage, your car payments, for food and electricity and all the other necessities of life? Again, statistics compiled by the Council for Disability Awareness are sobering:

• According to the Federal Reserve Board’s Survey of Consumer Finances in 2004, 44 percent of families spend more than they earn;
• A 2006 article in Parade Magazine reports that two-thirds of American families live from paycheck to paycheck, that the average household has a negative savings rate and that credit card debt is at an all time high;
• In February 2005, the journal Health Affairs reported that unexpected illnesses and injuries cause 350,000 personal bankruptcies each year and that disability accounts fork nearly half of all mortgage foreclosures;
• In 2004 the National Investment Watch Survey found that more than 70 % of working Americans do not have sufficient savings to meet short-term emergencies.

Looking to the future, the lost of income due to disability could be substantial. For instance, if you became disabled at the age of 25, were earning $2,000 a month and remained disabled until age 65, you would lose $960,000. If long-term disability occurred at the age of 50, and you were earning $8,000 a month, by age 65 your lost income would amount to $1,440,000. Since earnings usually increase over the years, your total loss of could be much greater.

Now that you understand the risk and the potential for significant loss of income, you may have come to the conclusion that it would be wise to purchase an individual disability income insurance policy to protect you and your family.

If these facts and statistics have caused you to reconsider your need for disability insurance, use the chart (above), which is based on actual claims experience, as a guide so you can be certain that the policy you choose protects you from the leading causes of disability. (Be especially alert to coverage for psychiatric and emotional disorders because many insurance companies place a two year limit on benefits paid for those disorders..)

Individual disability income insurance helps you to pay living expenses while you are unable to work. It offers some paycheck protection by helping to meet your mortgage payments or rent, groceries, utility bills, car payments, and other necessities. . Disability insurance benefits also can pay for training, or any other assistance you may need to return to work.

V. TAKING ACTION

Before purchasing an individual disability income policy, you need to evaluate any disability benefits you may be eligible to receive from your employer, the government, or other programs. Then you need to look at your assets to determine what could be liquidated if you become totally disabled.

Employee Benefits

For short-term illness, your employer may provide sick leave, short-term disability insurance, or both. Sick leave and short term disability coverage can range anywhere from a few days to as much as a year, depending on your company’s benefits and your length of employment.

For a longer disability, usually one that lasts six months or longer, your employer may provide group long-term disability income insurance. Group long-term disability coverage replaces part of your salary if you are disabled and unable to work. A typical policy replaces at least half of your salary, up to a specified maximum, such as $5,000 per month. Long-term benefits begin when short-term benefits stop. Benefits from group long-term disability policies generally continue until either age 65 or your retirement age under Social Security, or until you are able to return to work.

Social Security

Social Security provides long-term disability benefits based on your salary and the number of years you have worked and contributed to Social Security. However, Social Security disability benefits replace only a limited portion of your salary, and the eligibility requirements are very restrictive. To be eligible all of the following conditions must be met:

1. You have been disabled for five full calendar months;
2. Your disability is expected to last at least 12 months or end in death;
3. You were unable to be gainfully employed at any occupation, not just your own occupation, at the time your disability began.

Other Resources

Other programs also may provide some aid for those who have become disabled. These include:

1. Workers’ compensation for work-related injuries or illnesses required in all states.
2. Special disability programs for veterans injured in war, federal and state government workers, railroad employees, or miners who develop black lung disease.
3. State vocational rehabilitation programs.
4. Automobile insurance benefits for a disability resulting from an auto accident.
5. Temporary disability programs in California, New York, New Jersey, Rhode Island, Hawaii and Puerto Rico.

And Some Caveats

You need to be aware that most alternatives to replacing lost income are only halfway measures, at best.

1. You can’t rely on Social Security. Qualifying for Social Security benefits is very difficult because the disability must prevent you from doing any kind of work ”” not just your usual job. Requirements state that, to be eligible for Social Security disability benefits, one must be completely disabled with no hope of recovery for a period of at least one year or have a disability expected to end in death. Also, there is a 5-month waiting period. Plus, the Social Security administration is notoriously slow in making disability eligibility decisions, with a typical wait of at least 7 months.
2. You can’t rely on Worker’s Compensation. Worker’s Compensation only covers job related sickness or injury. In addition, benefits are limited.
3. You can’t rely on your savings, on your family or on a bank loan. If you saved just 5% of your income each year, a six-month disability could wipe out 10 years of savings, forcing you to liquidate assets or turn to family and friends. Borrowing may not be an answer because banks and other lenders may be reluctant to give a loan to a disabled person with no income and no apparent means to repay the loan.

You also need to understand that some of your benefits may be reduced by other benefits you receive or that your benefits may be capped. This also will be true of any disability income insurance policy you buy. Benefits from all sources are usually limited to 70-80% of your monthly salary, though policies that pay only 50-60% of salary also are common. There is a reason for this limitation. Insurance companies do not want people to remain disabled when they could be working, which could happen if the benefit is equal to or more than after tax earnings. If you paid the premium for your disability income policy with after tax dollars, then your monthly benefit is tax-free. Most polices do not replace commission or bonus income. You need to know the facts.

If you want to be sure that your income is protected during a period of disability, you need a disability income protection plan.

VI. FACTORS INFLUENCING COST OF A POLICY

A number of factors determine the cost of an individual disability income policy. They include:

1. AGE. Younger persons pay less per year for a policy than those who are older and, therefore, more likely to become disabled.
2. BENEFIT AMOUNT. Policies that replace a larger percentage of salary are more expensive. A policy that replaces 80% of salary costs more than one that replaces 60% of the same salary. Similarly, policies that replace a larger salary are more expensive than policies that replace smaller salary.
3. BENEFIT PERIOD. The shorter the benefit period, the less expensive the policy. For example, a policy with a two-year benefit period costs less than a policy that pays benefits to age 65, or the retirement age specified by Social Security.
4. CURRENT HEALTH STATUS. Your health status determines not only whether you are eligible for insurance, but, also if you are, whether you are eligible for standard rates or rates that are higher. A policy may also exclude from coverage any health conditions that exist before the policy is issued.
5. DEFINITION OF DISABILITY. A policy that pays benefits if you are unable to perform the duties of your own occupation is more expensive than a policy that pays benefits if you are unable to perform the duties of any occupation for which you are reasonably qualified. The insurance company is less likely to have to pay benefits in the latter case.
6. DISCOUNTS. Many companies offer discounts for policies issued at the same time on more than one person, and when an employer (or association) collects the premiums for individual policies from employees and pays the insurer.
7. EXTENT OF DISABILITY. A policy that pays benefits only if the policyholder is totally and permanently disabled costs less than a policy that also pays benefits for a partial or temporary disability.
8. GENDER. Women usually pay more than men for an individual policy because typical claim costs are higher for women. Under a group policy, however, men and women usually pay the same rate.
9. OPTIONAL BENEFITS. For an extra premium, some policies offer additional benefits, such as cost-of-living increases or the option to purchase higher benefits in the future.
10. SMOKER/TOBACCO USE. Most companies either give a discount to non-tobacco users or add a surcharge to the premium for tobacco use.
11. TYPE OF JOB. Expect to pay more for a policy that covers a high-risk occupation.

VII. CHECK OUT THE COMPANY

Finally, when you do purchase a disability income policy, check to be sure that the company and the agent you have chosen are both licensed in your state. If you are not sure, contact the state insurance department. An online source for contact information for all states is www.naic.org, the web site of the National Association of Insurance Commissioners (NAIC), an organization of insurance regulators from each state.

You should also look for a company that is reputable and financially strong. Several services rate the financial strength of companies. Rating information can be obtained from your agent and public or business libraries.

Case Studies: How is Cost of Disability Insurance Determined

Case Study 1: Jane’s Unexpected Injury

Jane, a 35-year-old software engineer, experienced a serious accident while hiking. She suffered multiple fractures and required extensive medical treatment. As a result, Jane was unable to work for six months.

Without disability insurance, Jane had to rely solely on her savings, which quickly depleted due to medical bills and everyday expenses. The financial strain significantly impacted her and her family’s quality of life.

Case Study 2: Mark’s Long-Term Illness

Mark, a 45-year-old marketing executive, was diagnosed with a chronic illness that rendered him unable to perform his job duties. As his condition worsened, Mark realized that he had no disability insurance coverage.

With no income and mounting medical expenses, Mark had to sell his assets and rely on the support of family and friends. The emotional and financial stress took a toll on Mark’s overall well-being.

Case Study 3: Sarah’s Career-Altering Accident

Sarah, a 28-year-old professional athlete, suffered a career-altering accident during a competition. The injury left her permanently disabled and unable to continue her athletic career.

Sarah had not considered disability insurance since she believed her sport was her only source of income. Without coverage, Sarah faced significant financial hardships as she adjusted to a new lifestyle and sought alternative career opportunities.

Case Study 4: John’s Unforeseen Illness

John, a 52-year-old accountant, experienced a sudden and severe illness that required prolonged medical treatment and recovery. Unable to work for an extended period, John faced a substantial loss of income. His employer’s short-term disability benefits were limited and expired before he fully recovered. Without supplemental disability insurance, John struggled to cover his living expenses and support his family.