Thursday, June 15, 2017

Life vs Disability Insurance -- Why are we far less likely to protect ourselves against the more likely event?

42 out of 100 ASHA staff are worried enough about protecting their families to buy life insurance, but only 25 in 100 had individual disability income insurance. These coverage choices don't reflect the actual risk. We undertook an initiative to offer supplemental disability (aka individual disability income) insurance to all our staff that had not taken it at the time they were hired. Now 53 out of 100 have individual disability income insurance. This initiative more than doubled the number of people with coverage. 

People are far more likely to become disabled during their working years than to die. You hear all kinds of numbers thrown around. I looked at disability and death probability tables published by the Social Security Administration for insured workers born in 1996. Death is pretty indisputable, but disability is more subjective. The Social security Administrations standard of disability is high, so this gives us a conservative estimate of disability.
  • Males born in 1996 (so they attained the age of 20 in 2016) have a 26.3% probability of disability before age 65 and a 7.2% probability of death.
  • Females born in 1996 (so they attained the age of 20 2016) have a 24.8% probability of disability before age 65 adn a 3.6% probability of death.
You can calculate your personal likelihood of disability using this tool from the Council of Disability Awareness.  

Why are we far less likely to protect ourselves against the more likely event? Most of us cannot afford to live without a paycheck. Medical problems contribute to 62% of all personal bankruptcies filed in the U.S. and half of all home foreclosures. We’re lucky that ASHA insures 60% of our income for us, but the extra 15% we have the opportunity to buy can make a huge difference if misfortune strikes.  I assumed that many of my colleagues had not made a fully informed decision and worked with UNUM to offer supplemental disability (aka individual disability income) insurance to all our staff that had not taken it at the time they were hired. This was not easy. It took two years of hounding UNUM using every angle and connection I could muster to get them to agree. (A special thanks to Zack Pace at CBIZ and Carol Harnett at the Council for Disability Awareness for their help.) 

I met with the 205 people we extended the offer to and explained how they get paid if they can't work. I drew a timeline from that date to their 65th birthday and walked them through how family and medical leave, sick leave, annual leave, short and long term disability coverage work. 92 accepted the offer of coverage. Here's some of what we discussed. 
Can you live the way you want to live on 60% of your current salary? If the answer to this question is “yes,” you don’t need additional disability coverage. If the answer is “no,” keep reading. Our group policy that ASHA pays for insures 60% of our income. If you choose to purchase supplemental coverage, it raises your benefit from 60% of your salary to 75% of your salary.

What are your chances of becoming disabled? Probably higher than you might think. Just over 1 in 4 of today's 20 year-olds will become disabled before they retire. 
What are the most common causes of disability? If you’re healthy, you probably think of accidents first, but they’re not usually the cause of disability. Illnesses like cancer, heart attack or diabetes cause the majority of long-term disabilities. Musculoskeletal disorders like back pain, arthritis, spine/joint disorders, and fibromytis are also significant causes. Happier circumstances can also lead to disability for example, if a woman is placed on an extended period of bed rest when pregnant.

How long does the average period of disability last? The average group long-term disability claim lasts 34.6 months, so about three years. One in eight workers will be disabled for five years or more during their working careers.

How many years do you plan to continue working? In thinking about the value of disability coverage, your age matters because the typical benefit period is until age 65. That means you’ll receive disability payments from the time you become disabled until you reach the age of 65. If you’re between 65 and 75 when you become disabled, the maximum benefit period is 24 months. If you’re over the age of 75, the plan only pays you for 12 months. Once you reach retirement age, disability coverage may not be a good value. You might want to consider additional long term care coverage instead. 
It just goes to show you that people need help to make a fully informed decision. The role of disability coverage in protecting income is not well understood. We've changed our onboarding process and I now meet with every new hire to explain this coverage in particular and then we make sure that we get a decision from everyone so that they haven't set aside the information and forgotten about it. With any luck, no one will ever need it, but I'll sleep better knowing everyone who wants the coverage has it. 

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