The Often Misunderstood Disability Insurance
I’d like to start with an insurance joke, followed by an insurance riddle.
What is less fun to talk about than life insurance? You guessed it… Disability Insurance!
Now, the follow-up riddle. What is more likely to happen during your career–getting disabled or dying prematurely? (I’m hoping by now you’ve caught onto the theme.) The answer? Disabled.
As a matter of fact, you are three and a half times more likely to get disabled during your career than die!
Why, then, are we so focused on life insurance and often neglect disability insurance? Working in the financial planning industry for almost two full decades, I have a few theories as to why. Below, I’ll list them out and give my thoughts behind each observation.
1. It isn’t fun to talk about.
This is as true as the day is long. I get it. I’d much rather spend hours discussing how much money a client has saved and how they can make more. It’s also fun to talk about spending that money on family, vacations, and other passions. No one goes to a cocktail party and brags about their excellent disability insurance. But, my job is to have those tough conversations–about death, unemployment, and disability. Doesn’t get me picked to sit at the cool table at lunch, trust me. That said, I am not paid to sit at the cool table. At Diversified, we are paid to protect you and your family from a tragedy hindering your finances.
I’ve often talked about losing my amazing father at the young age of 61. What I don’t often talk about was that he got disabled when I was a freshman in college. The fact he had excellent disability insurance kept our family together. This shouldn’t be something to fear discussing. It’s a dialogue worth having.
2. The costs aren’t cheap.
Since the likelihood is relatively high of using it, the costs can be expensive (like any insurance). However, if you have a group policy through your employer these costs may be subsidized and cheaper. When looking at costs, it’s important to look at the benefit and risks associated. One-third of all working Americans will experience a disability of at least 90 days at some point in their career.
We all have to look in the mirror and ask ourselves can we afford not to have proper disability coverage. Can your family survive an extended period of time without your income? The old insurance salesman line goes something like this, “if you had a machine in your basement that shot out the equivalent of your salary every year, would you insure it?”
these questions make you uneasy, maybe it’s time to revisit the disability insurance
3. It is often misunderstood.
Basically, disability insurance is an unknown, as it’s never taught to us in school. We misunderstand the risks, what is covered, and all the benefits. Let’s break it down on a high level. Disability insurance is a form of income replacement that provides payments if you are unable to work. However, it is an important factor to know what the insurance company defines as “able to work.” It could be your job specifically or any form of employment. Of course, the more detailed the definition of work, the higher the costs. There is a lot out there to understand, but I wanted to get some of the basics to you to help demystify this insurance.
4. We are “insuranced” to death (no pun intended).
We have life insurance, medical insurance, car insurance, homeowner insurance, and flood insurance. Heck, we even have insurance on our mobile devices (which you may be reading this on right now). Do we really need another insurance? Are we going to take our entire income and pay for insurance? The solution to this issue is simple, prioritize! What is worth protecting and what isn’t? Understand the risks and probability of what happens if a claim is necessary. The answer may be to keep all the other insurances, but adjust the amounts or deductibles. You can probably scrounge up hundreds, if not thousands, of dollars that way. Once freed, you can spend that money on other more critical insurances.
5. We are covered at work.
This is an interesting one. Most of our executive and professional clients have something through their employer. Generally, this is the least expensive route to go (sometimes it’s even free). The couple of questions to ask while reviewing what’s available at work are:
a. Do I have enough coverage? The standard coverage may not cover your bonus, or you may actually make more than their basic coverage package. If so, it might benefit you to look into increasing it somehow.
b. Can I buy more through work? Much like your work life insurance, you may be able to have a few more dollars deducted to increase your coverage to the maximum allowable. My advice, do it!
c. How am I paying for this coverage? If with pre-tax dollars, then your benefits would be taxable. If paying with after-tax dollars, they would not be taxable. Look into this, as it may benefit you to adjust.
d. Is it portable if I leave this employer? What are the terms of the policy if you leave your employer? You may go to a new company in the future that doesn’t offer anything. Then you’ll be older and your coverage would be more expensive (for an individual policy). Review if it makes sense to consider a smaller independent policy in addition to anything you have at work.
Go have that conversation.
Whether you are already working with us or not, it’s a good time to go review your disability coverage. Really get an understanding as to what is covered and what isn’t. Get a feeling for how much and how long you are covered. Put all that in a pot, stir it around (with your willingness and ability to handle a disabled event), and voila! Your answer sits before you. I’m happy to have a conversation about all this (while sitting at the cool table, or not).