A disability can cripple a person’s ability to work and earn a living. It also can maim a family’s financial plan more than a death of a bread-winner, because the disabled person still has living expenses to pay, plus the medical bills necessary for his or her care.
One way to counteract this is through disability insurance. But disability insurance is not typically a high priority when making a financial plan, because most people don’t think they need it.
In 2010, about 19 percent of the U.S. population — nearly 57 million people — were living with a disability, according to the U.S. Census Bureau.
About 40 percent of those disabled Americans were in their prime wage-earning years, from 18 to 64. The Social Security Administration projects that one in four of today’s 20-year-olds will become disabled before age 67.
Cathy Pareto, a certified financial planner, sees disability insurance as an essential piece of the financial-planning puzzle, along with saving for retirement or college, and creating an emergency fund.
“You have to think about the possibilities of the unknown. You have no idea what medical condition you could be in in 15 or 20 years. What if you have a debilitating heart attack or a stroke, and you can’t walk, or write, or speak?” said Pareto, president of Cathy Pareto and Associates in Coral Gables. “It’s the only real way to safeguard against those possibilities. I see it as one of the basic building blocks of a sound financial plan.”
There are three basic types of disability insurance: employer-sponsored plans, private individual insurance, and government-sponsored plans, such as Social Security disability.
A common misconception is that Social Security will automatically take care of you if you become disabled, said Ron Reshefsky, chairman of Century Risk Advisors in Coral Gables and Boca Raton. But it’s difficult to get approved, he said. According to the Social Security Administration, about 65 percent of initial Social Security Disability Insurance claims were denied in 2010.
Another misconception is that most disabilities are caused by accidents, said Wayne Green, a certified financial planner and regional manager of CPS Insurance in Boynton Beach. Most disabilities occur because of illness, he said.
Reshefsky said a disability that interferes with your wage-earning potential can be a life-changer in more ways than one.
“If you don’t have the wages to do things like make investments or prepare for retirement, you’re not going to be able to afford it, because you’ve lost your income,” he said.
The more money you make, the more disability insurance is necessary, Green said.
Check with your employer to find out what disability insurance it offers. If you have none or it’s not enough, get quotes on long-term disability.
Short-term coverage typically only covers you for 60 to 90 days, which you should be able to manage on your own with an emergency fund. “Short-term disability is not that expensive, but if you’re a decent saver, that is your short-term disability. Should you really pay extra for that?” Pareto said. “Long-term disability is what you need to think about.”
Long-term disability insurance premiums will depend on things like your age, health, previous injuries, whether you smoke, and the amount of income you’re trying to replace. The type of work you do affects the premium, because a white collar office worker can get a better rate than a construction worker who is out in the field and has more exposure to an accident, Green said.