March 29, 2007

Source: InsuranceNewsNet

Death or dying is something that every living person has thought about at least once. The idea of death, the fear of it, haunts the human animal like nothing else, said the late cultural anthropologist Ernest Becker. But according to Social Security Administration there is one other thing that people should think about – disability. While disability is something most people do not like to think about the agency said the chances of becoming disabled is possibly greater than most people assume.

In 200, the U.S. Census Bureau reported that almost 20% of the population suffered from some form of long-lasting condition or disability. Social Security cited a study showing that a 20-year-old worker’s chances of becoming disabled before retirement is 3 in 10 (or 30%). 

That is much higher than the chances of being killed in a bathtub accident, a car accident, any non-transportation accident, or by terrorist attack while visiting a foreign country. In fact, the chances of dying from any kind of injury during the next year are 1 in 1,820. Meanwhile, the chance of dying before reaching the age of 65 is only 17.4% and that is expected to level off further.

These figures indicate that between an early death and disability, the latter is the bigger threat. It is a threat 56% of adults in America cannot handle according to a new research by the National Association of Insurance Commissioners (NAIC).

In the recently released report NAIC said majority of Americans are not ready to cope with the possibility of becoming disabled and unable to work. More than half of the respondents said if they were unable to work for a year because of disability they would not be able to pay their bills or meet expenses. While the effect of disability on finances can be significant, 87% of the respondents believe disability is something that won’t happen to them.

Walter Bell, NAIC President and Alabama Insurance Commissioner said disability insurance is critically important in having financial security. Yet only 44% of the people surveyed said they had long-term disability coverage. Those who had insurance coverage for long-term disability, only 29% had personal policies while the remaining 71% relied on employer-paid plans.

Although different insurance companies have various definitions for “disability,” it s generally the inability to perform work because illness or injury. The U.S. Department of Education and the National Institute on Disability and Rehabilitation reported the most frequent causes of long–term disability are heart disease, back injuries, cancer, anxiety and depression.

Disability insurance plans – which are not the same as workers’ compensation – can be short–term or long–term. Short–term disability insurance replaces a part of the policyholder’s salary usually from three to six months following a disability. A personal disability income policy typically replaces 45% to 70% of the insured’s gross income on a tax-free basis.

Long–term disability insurance coverage begins after the policyholder is unable to work for at least six months after being disabled. Depending on the policy and type of disability, the coverage provided can last for a stipulated number of years, until the policyholder retires or reaches 65.

The costs of disability insurance policies vary and depend on several factors but they are generally more expensive than life insurance. The factors that affect the premium rates include age, gender, monthly benefit amount, and optional riders. Policies purchased at a younger age have lower premiums. Women pay 50% to 75% more than men.

Because they can be costly consumers may be tempted to settle for the cheapest disability insurance policy available. Some experts view this as throwing money away because bargain contracts may pay actually significantly lower monthly benefits than more expensive policies.

Rather than price, it is better to pick disability insurance plans based on potential needs. Young and single workers need enough coverage to pay their bills in case of disability especially if they have no one to depend on financially. Seniors who are still working should keep disability insurance in force until the age of turn 65 or retirement.

Young families who rely on joint incomes should consider long-term disability insurance for both to cover typically expenses such as mortgage and childcare. For more established families should factor in their regular expenses, their children’s college tuition, and retirement when purchasing a policy.
In choosing a disability policy one should consider the following:

• Definition of disability as specified in the policy
• Conditions excluded from coverage
• Percentage of the current salary that will be replaced
Length of salary replacement
• Waiting period before benefits kicks in
• Availability of partial benefits if policyholder works on a part-time basis
• Inflation protection feature
• Policy renewals without undergoing new medical exam
• Effect of benefits on Social Security, workmen’s compensation, or unemployment benefits
• Financial stability of the insurance provider

The value of disability insurance is often overlooked. It may be expensive but the alternative – long periods of disability with no income – is far more financially devastating.

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