By: Daniel Potter
Before we get started, let me note that I have both an individual and group disability/income protection policy for myself. I really do think that income protection is important. My family depends on my income for housing, food, clothing etc. This post will not try to scare you into buying Disability Insurance. Rather, my goal is for you to thoughtfully consider if income protection insurance would make sense in your situation.
What is Income Protection?
Income Protection insurance, also know as Disability insurance, is used to replace a portion of your income if you become disabled. This insurance is divided into short-term and long-term lengths. Short-term plans usually cover disabilities that last 3 months or less. Long-term income protection covers disabilities that last longer than 3 months.
We will mostly be focused on long-term income protection as that is where the greatest risk lies. Short-term plans only last for three months. While this can represent a hardship, emergency funds or other help usually means a short-term disability will not be catastrophic. It is when you lose your income for years that major hardships usually arise.
What Does it Mean to be Disabled?
Being disabled, for the purposes of insurance, means that you are unable to preform all or part of your work. Many disability policies will also provide benefits if you can still work but you are not able to earn the same amount of income that you did before your disability.
What are Your Chances of Becoming Disabled?
Ask this question 50 times and you may get 50 different answers. Many sites and agents out there try and scare people with statistics that are not real. Stats like “25-year olds have an 80% chance of being disabled before they turn 65” are not real. Claims like this are at best stretching the definition of “disabled” and at worst, out right falsehoods.
So, what is the truth? Do you even need to worry about a potential disability? This Social Security Administration report indicate that someone born in 1997 has roughly a 1 in 4 chance to become disabled before they reach normal retirement age. Whatever the actual statistics may be, the fact is that disability due to injury, sickness, disease and mental health issues happen and they are not isolated cases.
What are the leading causes of Long-Term Disability?
It may surprise you that injury is not the main cause of disability. Here are the top 5 causes of long-term disabilities:
- Musculoskeletal disorders (arthritis, back and hip problems, etc.…) (29%)
- Cancer (sickness and the treatment can cause disability) (15%)
- Pregnancy (9.4%)
- Mental Health Issues including depression and anxiety (9.1%)
- Injuries such as fractures, sprains, and strains of muscles and ligaments (9%)
Injury accounts for less than 10% of long-term disabilities. So, just because you are not prone to injury does NOT mean you are not at risk for being disabled. Having said that, people that are healthy are at lower risk for disability overall. You most likely know of someone who has had some type of accident, illness or injury and had it affect their ability to work.
Can You Live Without your Income? Can your employees?
Well can you? This is an easy question to answer for most of us. Hopefully you can live without your income for a couple of months due to emergency fund planning. But what if you do not have an income for 6 months? 1 year? 5 years? Most people can not afford to maintain their current lifestyle without continuous income for a substantial amount of time. How will you afford housing? Food? Clothing? Gas? Insurance?
Many times, we are more prepared financially to pass away suddenly (life insurance) than we are to get disabled and lose our income! However, you are much more likely to become disabled than you are to die, no matter how you slice the statistics.
But I have health insurance!?!
You might think that because you have health insurance, you will be ok if you have a serious sickness or injury that requires expensive medical bills. What most people do not consider is that major health issues cause far more disruption in your life than just the cost of medical bills. Prolonged health issues and treatments often lead to job loss or reduction in ability to work. This is why loss of income is the leading cause of foreclosures in the US.
A Change in Thinking.
You have worked hard for your income and they lifestyle that your income allows you to have. Why not put something in place to protect it? We see the need to buy car insurance, home insurance, health insurance and life insurance, but what about protecting your main source of living income?
I bought disability insurance because I have a responsibility to provide for my family. Now the income that I have worked so hard for will stay with me, even if I can no longer work due to a disability. My income protection insurance affords my family with a sense of security and peace.
Will Social Security Disability Help?
SSD may help a small amount. The average benefit amount is only ~$1200 a month. Add this to the fact that it takes a year of being disabled before you can apply AND only 25% of applications actually get SSD. The point? Do not count on SSD to replace your income.
Types of Disability: Own Occupation vs Any Occupation
The type of income protection insurance you buy is important. The two main categories of disability insurance are “own occupation” and “any occupation”. Own occupation DI says that you will be paid DI income if you cannot preform your specific job. This is the better classification as it affords more protection. Any Occupation says you are only disabled if you can not do ANY job. There are many plan options to consider when looking at disability insurance and we are here to make sure you get the best policy for your money.
Three Paths to Income Protection: Individual, Group or Both?
So, you want to look into protecting your income, how should you go about it? The cheapest option is to get income protection/disability insurance through your job. This is usually quite cheap and while it will not cover your complete income, it will usually cover about 60%. If your company does not currently offer group disability insurance, we would be happy to help you look at group DI options and help you sign up for a plan.
The other option is to get an individual DI policy. These can cover more of your income, but they will also be more expensive. The advantage of an individual policy is that it stays with you, no matter what job you have. Group disability is almost always tied to a specific job.
What do I do? I have both! Group disability insurance will stack on top of individual disability insurance. Usually you must put the individual policy in place first. My individual policy would allow my family to get by if I were to be disabled. My group policy stacks on top to ensure I will lose none of my income if I become disabled.
Consider what you would do if you lost your income. Can you afford to have no protection in place? Give us a call today and we can help you think through the options!