Do I Really Need Disability Income Insurance?
What are the chances I will become disabled?
Won't Social Security cover me if I become disabled?
What do I need to do?
Of course you only need disability income insurance if you actually become disabled between now and when you retire, but before you decide to take your chances consider the following.
What are the chances I will become disabled?
"The chances of becoming disabled are probably greater than you realize. Studies show that a 20 year old worker has a 3-in-10 chance of becoming disabled before reaching retirement age." - SSA.gov, 4/7/04
...whereas, that same 20-year-old has only a 17% chance of dying before age 65. - Table 10. National Vital Statistics Report, Vol. 47, No. 28, 12/13/99
Chances of becoming sick or hurt for three months or longer are:
Age 30 | 42% chance |
Age 35 | 41% chance |
Age 40 | 39% chance |
Age 45 | 36% chance |
Age 50 | 33% chance |
Age 55 | 27% chance |
Illinois Mutual, 9/1/03 |
Won't Social Security cover me if I become disabled?
Social Security disability claims can take an extremely long time to be processed and the application that is approved upon submission is the exception, not the norm.
To receive disability, a state agency of the SSA must first review the claim in a process taking an average of three to four months. Approximately 65 percent of the 2.5 million people filing disability claims each year are denied at first, until appeals are heard by federal administrative law judges. 62 percent of appeals are ultimately approved, but average waits for hearings range from an additional nine months (Harrisburg, PA.) to 31 months (Atlanta, GA). Source: http://www.efmoody.com/insurance/disabilitystatistics.html
48% of all home foreclosures are the result of disability, while only 3% of foreclosures result from death. Source: Housing and Home Finance Agency of the U.S. Government, 1998.
Most People have savings to cover less than six months of expenses. Source: Business Almanac, 1997
More Factors to consider about disability income insurance coverage: (Tony Steuer), Nearly half of the 1 million Americans who filed for bankruptcy protection last year did so after being sidelined by an unexpected illness or injury. Source: New York Post, April 3, 2000; “There’s no insuring you won’t go bankrupt”.
A Census Bureau study found that a typical 35-year-old making $50,000 a year had enough savings on hand to cover only two months of expenses. Yet most disabilities last 90 days or longer, and more than 1.5 million Americans are considered permanently disabled and unlikely ever to return to work.
What do I need to do?
Step 1: Analyze the needs of you and your family if you were to become disabled.
- What are your total current expenses paid out from your check after taxes each month? (Include house, phone, utilities, groceries, clothes, transportation, and health, home, and auto insurance, etc.)
- Add to that additional medical expenses for your disability including additional copays and out-of-pocket expenses.
- You will have doctor visits to keep. Your spouse may have to miss work to take you.
- Your spouse's health may also be affected by the added stress.
- You may have to pay someone to take care other chores that you may have taken care of in the past, such as lawn work, accounting, child care, cooking, cleaning, etc.
Step 2: Assess your assets. What assets do you have that you could use to get you by on until you could get back on your feet?
- Include emergency funds, stocks, savings, etc.
- Consider help that you may be able to get from family and friends, such as transportation, help with chores and care, money, a place to stay if necessary.
- Do not include social security (it only pays if you are out of work for a year or more).
- Do not include equity in your home. Downsizing to a smaller home may not be possible. Very few lenders are willing to lend or refinance to someone who is out of work. Also, if you were to sell your home and rent, the monthly payments are usually larger than your house payment.
- Do not include your 401k. If you become disabled it is highly unlikely that you will be able to reimburse it later and Social Security is unlikely to provide for you at retirement.
Step 3: Evaluate your situation.
- If your assets are greater than your needs-- Congratulations! You are one of few who are on their way to a measure of financial security. If you have not already done so, evaluate your financial position regarding your life insurance needs, health insurance, and retirement.
- If not, you are among the majority of people who have no idea how their family would cope if they were to become disabled.
Step 4: Get covered.
- Determine how much disability insurance you will need or for which you may qualify. Most companies will not offer more than 60% to 80% of your current salary.
- Become familiar with the options available.
- Get quotes with and without the options you would like. Disability insurance can be expensive, but by getting multiple quotes you will be more able to prioritize options to conform with your budget.
- Compare policies. Policies that offer the same options can still vary greatly depending on their definition of disabled, own-occupation, and other factors.
- Fill out and submit an application.