None of us plan on becoming disabled, but the reality is that nearly 25 percent of working Americans will be faced with a disability before they retire, which means they’ll become too sick or injured to earn a paycheck. Most of us don’t have disability income protection or enough emergency savings to last the average duration of a long-term disability of more than 2½ years.1 It also surprises people to learn that the majority of disabilities are not caused by accidents, but by illnesses, such as cancer, heart disease, and muscular and joint disorders.
Organizations such as the Council for Disability Awareness (CDA) and industry efforts, such as Disability Insurance Awareness Month (DIAM) in May, are improving our understanding of how we can preserve the lifestyle we’ve worked so hard to achieve by protecting our income against the financial impact of a disability.
Consider these compelling statistics:
· One in four of today’s 20-year-olds will become disabled before retirement age.2
· Only 33 percent of private sector workers have access to long-term disability benefits through their employer, and 40 percent have access to short-term disability benefits.3
· At companies with fewer than 100 workers, only 29 percent have access to short-term disability coverage and 23 percent have access to long-term disability coverage.3
· Ninety percent of long-term disability claims are not caused by accidents, but rather illnesses, such as joint and soft tissue pain, cancer, heart disease, and mental illnesses.4
So why do so few of us protect our incomes through disability income insurance? This is what we really need to think about. Findings from The Guardian Study of Financial and Emotional Confidence™5released earlier this year found that 78 percent of Americans are worried about their financial future, but their behaviors often contradict the financial priorities they identify as most important in their lives.
It’s a top priority for people to protect themselves and their families against the financial impact of either dying or becoming unable to earn a paycheck due to sickness or injury. And yet only about 40 percent of respondents had any type of disability income protection.
Guardian’s fourth annual Workplace Benefits Study6 found that three in five of us could not live off of our savings for more than six months if we were to become ill or injured and unable to work. If you have access to long-term disability coverage through work, this can offer a good foundation, but generally it provides basic coverage, with only around 40 percent income replacement after taxes. Plus, as a one-size-fits-all company benefit, income replacement amounts might not align with your specific income situation.
Social Security Disability Insurance is not a solution for most of us because even if you qualify under the stringent requirements — only about half of applicants are ultimately approved — the average monthly benefit paid is barely above the poverty line7 and may be subject to federal income tax.
Those who have invested a great deal in their education — including business professionals, physicians, dentists, attorneys and engineers — may have substantial student loan debt and need supplemental income protection to meet their financial obligations in case of a disability. Unlike many other kinds of debt, student loans cannot be discharged in the event of bankruptcy. Many graduates assume that federal student loans come with exceptions in the case of disability, but the government’s standard is quite restrictive. And private loans may not have any provisions for disability at all. These individuals should look for policies with features that provide income replacement specifically for them to continue repayment of their student loan debt.
A good first step is to think about what’s at risk if your income were to be taken away or if you suddenly found yourself taking a 60 percent pay cut. What effects would that have on your lifestyle, your family and your future plans? Online calculators are now available to help you determine how much income replacement you might need and what a monthly policy would cost. If you have coverage through your workplace, make sure you know what it covers, how much it covers and who owns it. Generally, this is not owned by the employee, so having your own individually owned disability income policy that you can take with you, no matter where you work, is quite valuable.
At the end of the day, we’ve worked too long and too hard to risk the financial devastation that can occur from being out of work for an extended period of time due to sickness or injury. Medical advances are allowing us to live longer lives, but for some, that may mean longer disabled lives. Ignoring the possibility is not the answer. Knowing what’s most important — and taking action to protect it — is a much better option.
2 U.S. Social Security Administration, Basic Facts, June 2016
3 Bureau of Labor Statistics, Employee Benefits Survey, March 2016
4 Council for Disability Awareness, Long-Term Disability Claims Review, 2012
Originally published at medium.com