Disability Insurance

4 things you need to know about disability insurance

The Aflac duck constantly quacks about disability insurance. But how much do you really know about it? Most likely not. And neither do your relatives, friends, or coworkers.

A study conducted by the nonprofit Consumer Federation of America and disability insurer Unum polled 3,000 Americans on their understanding of group disability insurance. As predicted by the two organizations, most people had many misconceptions about this type of insurance, with a hazy understanding of how the benefits work.

"Disability insurance is an important source of income protection for consumers, but it receives little attention from employer, worker, and consumer groups, as well as the press," says Stephen Brobeck, executive director of the Consumer Federation of America. "We thought a survey would bring more attention to this issue, and it has, in part because we discovered that when employees learn about group coverage, almost all of them want it."

Here are four facts about disability insurance that you should know in order to get your financial ducks in a row.

1. You’re more likely to make a disability claim for a disability related to an illness, rather than an injury.

Two-thirds of those polled said they would file a disability claim only if they were injured and needed to miss work for an extended period of time. However, the Council for Disability Awareness reports that common illnesses and chronic conditions account for 90% of all disability claims paid. Carpal tunnel syndrome, multiple sclerosis, and cancer are among them.

2. If you become disabled, there’s a 50 percent chance that you’ll be out of work for more than two years.

People polled were overly optimistic about how quickly recipients of disability insurance benefits could recover. They believed that three-fourths of people who had been out of work for three months due to a disability would be able to return to work within two years. In reality, only half of them can return within that time frame.

According to Marc Cesarano, an employee benefits consultant at the Savitz Organization in Philadelphia, this can cause significant financial and emotional strain on a family in the absence of a disability insurance policy.

"Being disabled for six months or more can have a cascading effect on one's financial situation." "At this point in time, most people's medical costs are rising, and they may lose their jobs," Cesarano says. "However, those who do not save money may find that their income is decreasing just when they need it the most."

3. You may not have the workplace coverage that you think you do.

According to the study, there is a significant gap between how many people believed they had disability coverage through their employers (65%) and how many actually do (32 percent). Many of those who thought they had coverage had no idea how much coverage they'd receive if they filed a claim, or how much the employee or employer paid in monthly premiums.

If you have (or believe you have) coverage through your employer, speak with someone in human resources about when you'd receive coverage if you needed it, and how it compares to your current salary. It may not be sufficient. Employer-sponsored disability insurance is typically shown as a percentage of your base salary, typically 66 percent.

According to Laurence Stybel, co-founder and former president of career management firm Stybel Peabody Lincolnshire Inc., "total cash compensation that consumers actually live on may be based on salary plus bonus (or commission)." "As a result, many employees are underinsured and are unaware of it."

Furthermore, many group policies — coverage purchased by employers — have time limits on how long a group policy will continue to pay out. Some employers only offer short-term policies, which may provide coverage for a few weeks to a year; some long-term policies may provide coverage for two years.

If you are underinsured, look into paying additional premiums to get more coverage. If your company does not provide any insurance, consider purchasing an individual disability insurance policy.

4. Disability coverage is more affordable than you may think.

According to the survey, the average monthly cost of employer-sponsored, long-term disability insurance plans ranged from $10 to $30 — an affordable amount that more than half of those polled said they'd be willing to pay for on their own, even if their employers didn't contribute.

Individual long-term disability insurance is generally more expensive, but it may be more comprehensive, if you need it (either because your employer does not provide it or because you are self-employed). The average annual cost for an individual disability premium is $1,684 for a $4,242 monthly benefit, according to the LIMRA trade group. The cost of your premiums is tax deductible if you are self-employed.

The bottom line

Experts say that if your family relies on your income to pay bills, disability insurance is an essential tool for keeping your household afloat in the event of a long-term illness or injury. The likelihood of requiring disability insurance is high. According to the Social Security Administration, one-third of all working Americans will become disabled at some point during their careers.

"Your ability to earn is your most valuable asset," says Susan Combs, president of Combs & Co. Insurance in New York. "You insure your car, your apartment, your business, and your life; why not your income?"