The Importance of Disability Income Insurance

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An excerpt from Follow the Money Weekly Radio with Jerry Robinson

by John Bearss

Transcript

Hi Jerry. Did you know that most people believe that they are adequately insured against disability because they think they have coverage through their employer or through the government. That’s probably why 80 percent of Americans don’t own private disability income insurance. However, assuming that you’re covered against disability through your employer or through the government is a mistake. Although 50 percent of employers cover short-term disability, only 40 percent cover long-term disability. Government programs, such as Social Security and workers’ compensation, may pay you benefits as well.  But you qualify for benefits only if you meet a strict definition of disability.

I talked with a client who worked for a major electronics company and was severely injured in a motorcycle accident on his way to work. He assumed that he was covered for disability under workers’ compensation, but his employer told him that because his accident wasn’t directly work-related, he wouldn’t be eligible for workers’ compensation disability benefits. His employer did tell him, though, that he was covered for short-term disability under the employer’s group plan, and he received those benefits for a year. At the end of that year, however, his benefits expired. Unfortunately, he still was not able to work and was left without income to pay his mortgage or his bills.
So today, let’s determine if you should buy some private disability income insurance.
The first thing you need to do is to analyze your current potential disability income sources.

Through government programs and group insurance, you may already be covered by some disability insurance. However, relying on these types of insurance without analyzing them first can be dangerous; government plans often pay benefits under strict definitions of disability.

Although you shouldn’t overlook the disability benefits you may be eligible to receive from Social Security, you shouldn’t rely on them either. Social Security denies more than 50 percent of the claims submitted, in part due to a strict definition of disability. If you are deemed eligible for benefits, you still won’t begin receiving them until at least six months after you become disabled because of the waiting period that applies. So check your Annual Social Security statement that you receive to see how much disability income might be awarded to you.

If you are injured at work or get sick from job-related causes, you will likely receive some disability benefits through workers’ compensation insurance.  When reviewing your disability insurance needs, remember that workers’ compensation only pays benefits if your disability is work-related, so it offers only limited disability protection.

Some government and private pension plans also may pay disability benefits. Often these plans pay benefits based on total, permanent disability, or your retirement benefit may be reduced in proportion to what you already received for a disability. In addition, remember that these benefits are usually integrated with Social Security or workers’ compensation, so your benefit may be less than you expect if you also receive disability income from other government sources.

Also, see if you are a part of a group disability policy at work.  Some companies offer short term disability insurance and/or long term disability insurance.  Make sure you read the plan documents to determine just how much income you would receive and for how long you would receive them.

Statistically, your risk of being disabled is great. It is estimated that every year, one in eight people become disabled.  How many people do you know who have had cancer or suffered a heart attack? How many of your friends and family members have been in car accidents or have had back problems? Illness, as well as injury, is disabling. If you were hurt or got sick, how would you support yourself or your family?

So take time to analyze your disability income sources.  Next week I will discuss what are your disability income needs?  Once you have deermined your disability income sources along with your disability income needs this will help you know how much income you will need to replace, with private disability income insurance.

I trust this financial insight has been helpful and I look forward to the next time when I can help you provide the foundation for a lifetime of financial independence.

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