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Disability insurance is the forgotten disaster protection. While disability insurance is crucial to security while you are working the statistics show that fewer people are opting in.
Forbes recently published an article about it.
There are important points relating to employee benefits. Individually owned long term disability insurance is also available and has important advantages. The Forbes article does not deal with those contracts.
What struck me in the article as important:
- In 2013 more employers offered long term disability insurance than in 2012, but the number of employees who opt-in is down about 500,000.
- If the employee pays for the benefit then the claim is tax free if received. If employer pays then the claim is taxable. Taxable claims are worth less so work it through.
- Employee benefits follow a formula. It may not suit your reality.
- Claims for women outnumber claims for men 56 to 44
- Disability is not an old person thing. 40% of claims are for people under 50
- Sickness is the big claim source. Injury causes about 10% of new claims.
People, especially young people, consistently underestimate the probability of a disability. Worse, they underestimate how long people who become disabled stay disabled. If you become disabled for more than 90 days, the expectation is about 1 in 3 that you go back to what you were doing ever.
People consistently overestimate the cost compared to the benefit. It is in presentation. A $200 monthly premium for a $5,000 monthly benefit seems costly. Bad thought. $5,000 a month is $60,000 a year and $1.2 million in 20 years.
Disability insurance is a contract based in nuanced definitions.
- By changing a single word. Like “regular” occupation becomes “any” occupation, you can cut the premium in half and probably the benefit total by 90%.
- Some contracts have attractive choices regarding partial disability. Some do not.
- Some have better definitions about dealing with a recurring disability.
- There are at least a dozen optional additions. Cost of Living, future purchase, and more.
The best advice for a client is find an advisor who does a lot of it. This coverage is by far the most difficult to assess and attach to a particular situation.
For most people, the ability to earn is your most valuable asset. It is frequently the most under-insured asset they own too.
Keep a simple principle in mind. If you find it hard to live within your income, you will find it extremely hard to live without it.
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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com
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