Disability: The Biggest Risk You Probably Haven't Covered

Face it, life happens, most often beyond your control, and it can sometimes produce some unexpected illnesses or injuries that can potentially disrupt your ability to keep your income flowing. In fact, the most valuable asset that most people have is their ability to earn an income. Yet for nearly 80% of income earners, it’s the one asset that they haven’t protected.

There is a plethora of statistics on the number of working people who suffer job disrupting disabilities and they vary widely from source to source. On average, the statistics point to a chance of 3 out of 10 that a person who enters the workforce today will suffer a disability that will result in a loss of income before they turn 65. Of those, one out of five will be disabled for at least a year, and one out of seven will be disabled for at least five years. The older you are, the higher your chances of incurring a disabling injury or sickness.

If you need more tangible evidence, consider this: Of all the foreclosures in the U.S. in 2016, half were a result of financial problems stemming from a disability. And, of the more than one million bankruptcies filed in the U.S. in 2016, nearly 60% were driven by medical issues. More to the point, of the nearly 3 million people who suffered catastrophic financial loss last year, 60% failed to protect their most valuable asset - their ability to earn an income.

Where’s the Safety Net?

When bad things happen to people, often the first place they look for help is the government for some sort of assistance. Unfortunately, in the case of an extended disability, the help is just not there. While there is a disability benefit available through Social Security, it is nearly impossible to qualify for due to the extremely strict definition of disability. For seniors with an incapacitating disability, there’s some limited help from Medicare for covering nursing home costs.

Disability Income Protection

Much of financial and life planning is centered on sound risk management which entails assessing your capacity to protect yourself against life’s risks using personal resources as opposed to buying insurance protection prior to the occurrence of the risk. For people without substantial savings or assets, they need to assess whether their financial situation will enable them to weather a long period of time without income.

For most people, the only available option that will fully protect them against the loss of income due to a disability is a disability income insurance plan. These plans are not inexpensive; however, they provide an essential blanket of protection over your income.

Disability insurance can be purchased from a life insurance company in one of two forms: an “own occupation (own occ)” policy or a “loss of earnings” policy. An own occ policy covers the actual occupation of the insured, meaning the ability to perform the specific activities of a specific occupation. A loss of earnings policy covers the income of an insured, so that if a disabled insured is only able to generate 50% of his income, that is the amount that the policy will replace. In both cases, there is a maximum amount on income that will be replaced, somewhere in the range of 60%.

What to Know About Disability Coverage

It’s based on the definition of “disability”. The definition is essential for determining how one qualifies for coverage and it can vary from insurer to insurer. The stricter the definition, the harder it is to qualify for benefits.

You may have to wait for benefits. Policies have a waiting period which is a period of time that must pass before any benefits are paid. If you don’t want to wait, your premium will be higher. People with a good-sized emergency fund can afford to wait longer thereby minimizing their premium cost.

How long will you need the benefit? This is another determinant of premium amount, the longer the benefit, the higher the premium. Disability plans are structured with varying lengths of benefits from two years to a lifetime.

Make sure they can’t take it away. That is, look for policies that are non-cancellable. You will also want to consider policies that offer inflation protection.