Disability Insurance, Rolling the Dice

I just returned from an extended Las Vegas Super Bowl Weekend and was thinking about what to write this week while on the plane back to JFK airport.  In many ways, insurance is gambling! 

There is a high probability of a disability occurrence happening, such as someone becoming disabled either mentally or physically.  As an Independent Insurance Advisor, also known as a “Field Underwriter,” my job is to ask questions then listen.  This is why we have 2 ears and 1 mouth as we are supposed to listen twice as much as we speak.  Nearly 50% of ALL individuals ages 34 or younger will be disabled for 90 days or longer prior to age 65. 

As per the Commissioners Individual Disability Tables, CSO/Society of Actuaries, see the chart below:

Age     Odds of Long-Term Disability     Average disability length

30                   51%                                                    4.7 years

35                   48%                                                    5.1 years

45                   40%                                                    5.8 years

50                   34%                                                    6.2 year        

There are generally 2 types of disability income insurance:

1. Group Disability Income Insurance: Group disability insurance is usually offered by an employer at no cost or for a nominal fee taken out monthly directly from your paycheck.
2. Individual Disability Income Insurance: Individual disability income insurance (DI) is usually purchased from an agent or broker, similar to life insurance.  There are significant advantages to doing business with an independent insurance broker!

Advantages of Group Disability Insurance:

1. Premiums are Affordable
2. Some policies are portable meaning you can keep it if/when you leave the company
3. The Business Owner can protect key personnel in the event of disability

Disadvantages of Group Disability Insurance:

1. Most policies have a monthly disability income “BENEFIT CAP” which is far less than the employee would need to provide for one’s family
2. Few policies have an “Own Occupation” definition of disability, meaning it is much harder to trigger a claim versus individual policies.

Our first task is to assess the risk probability based on the clients’ age, medical history, income level, occupation, amount of coverage, and details of the policy.  We come up with a monthly income need (usually between 40%-65% of income) then shop the policy to different insurance companies.  We then present between 1-3 company options to the client for review.  An Agent can ONLY present 1 company option!  My job is to find a comfortable premium to transfer the majority of the disability risk to the insurance company.

Regardless of a person’s age, the ability to earn an income is usually their most valuable resource.  Disability income insurance is the one type of insurance that workers cannot do without!  If this is the case, why do less than 50% of adult Americans own a personal disability income insurance policy?  The answer is based on cost, as a typical individual disability income policy will cost between 2%-4% of a person’s salary, depending mostly on age.  This is why it makes sense to apply for an individual disability income policy as young as possible.

Accidents are what most people think are the main cause of disability. This is incorrect!  Depression and back pain are the most likely to trigger a disability claim.  This has been exacerbated by Covid-19.  Disabilities can be triggered mentally or physically.  As an example, my friend is on disability from post-traumatic stress disorder (PTSD) from Hurricane Sandy. 

It is critical to consider how your bills would be paid in the event of a disability lasting more than 3 months.  Workers should consider how long they would be able to cover their expenses.  Couples should also consider whether they can survive on one partner’s paycheck if the other were to become ill or injured.  In most cases, an individual private disability income policy is the best way to handle this risk!

My top 3 tips to consider when buying an individual disability income insurance policy to protect you and your family:

1. Get Disability Insurance Quotes from an Independent Broker:  An independent insurance broker has a macro view of the marketplace and multiple insurance companies to shop rates and benefits for you.  For example, we have one insurance company that will cover a disability due to a botched elective plastic surgery procedure. 
2. Buy the “Own Occupation” definition of disability: Not all companies have this definition and some charge extra for it as a rider.  For example, a right-handed surgeon gets his or her right hand mangled when closing the car door.  With an “Own Occupation” policy, said surgeon goes on claim and can collect benefits and still work supervising others.  A policy without “Own Occupation” would have an “any occupation in their field” definition and would NOT be on claim in the previous example.
3. Do NOT Take a Tax Deduction for insurance premiums paid: This is where your CPA can make a big mistake getting “greedy” for deductions.  If you pay your premiums with “after tax” dollars, 100% of your monthly benefits are TAX FREE!  If you take the small annual premium tax deduction, 100% of your monthly benefits are taxable!

Are you confused?  These are critical individual and family planning decisions that should not be taken lightly.  For a better understanding of these policies and rates, feel free to reach out to me at [email protected].