Better safe than sorry - disability insurance

Black Enterprise, April, 1992 by Steve Bergsman

People insure just about anything--their lives, houses, cars and evn their pets. But usually one of the most important aspects of their lives goes uprotected by insurance--their earning power. One way a person can maintain a previously established standard of living in spite of a debilitating injury is through disability insurance coverage. Disabililty insurance should be seen as paycheck protection. So, if you are sick or can't work, such coverage will replace your income.

No one experts to become disabled, of course. Especially not those titans of industry in their 20s and early 30s who are just beginning to take the business world by storm. The grim fact is, however, when you are young, the chances of becoming disabled are much better than dying. Anyone who is under age 35 has a 65% chance of experiencing a disability that will keep him or her out of work for at least three months--while the bills keep coming.

Life and car insurance are always paramount in one's mind, at least during those times of the year when the payments are due, but disability insurance is usually paid by an employer. However, there are government-sponsored programs covering certain categories of workers. People often confuse disability insurance with worker's compensation, which is not the same thing. Worker's compensation only provides for the employee if that person is injured on the job.

While worker's compensation laws are in effect in almost all states, this is not so with disability insurance. Currently, only five states, California, Hawaii, New Jersey, New York and Rhode Island, require employers to offer short-term disability insurance.

Whether required by law or not, company-paid disability and worker's compensation are not enough. Company-paid disability appears to be comprehensive, but it is often of a relatively short duration (six months to two years) considering when the effects of serious injury can last a lifetime.

Daniel R. Thomas, associate director of the Health Insurance Association of America, says the benefit of disability insurance is its long-term coverage for an injury or an illness that could occur anywhere. "It is protection that is going to exist for a minimum of two years and could last through the age of 65."

The Cost Of Suffering And Loss

Disability insurance is expensive when compared to other types of insurance. It can cost as much as 70% of your monthly income, or anywhere from $500 to $1,500. Still, the actual cost of the policy depends on a number of key factors. A major cost determinant is the type of work you do.

According to Charles Ross, a financial planner in Atlanta, disability insurance basically classifies jobs into five categories. The lowest classes are the most difficult and expensive to insure. Class one includes such occupations as construction worker, bricklayer, porter and ironworker. Class two includes semi- and unskilled laborers, barbers, clerical help and sales clerks. Class three would comprise white-collar workers, technical workers, teachers and real estate agents. Class four consists of technicians and office workers. And class five includes professionals--attorneys, architects, accountants, doctors, dentists and professors. "How your job is classified is going to make a difference as to whether you get coverage," Ross says. "Those jobs at the bottom are low-skilled and low-paying, so there is less incentive to go back to work."

Incentive to return to work also affects the decisions of disability insurers in offering 100% compensation. The reasoning is, if the employee gets 100% of salary while on disability, he or she would be less inclined to return to work. However, Thomas doesn't believe anyone needs 100% income replacement since a good portion of a person's income goes to job-related expenses--lunch, transportation, clothes.

Examining The Elimination Period

There is really no absolute amount of income that should be replaced. Obviously, anyone who wants to replace 60% of a $100,000 salary with disability income will pay more for a policy than someone replacing 60% of a $30,000 salary. (However, most disability insurance policies do have a cap.)

Another variable is the elimination period, or the period of time between the advent of the disability and when the policy begins to pay. Provident Life & Accident Insurance Co. of Chattanooga, Tenn., is the country's largest disability insurer. A typical Provident policy offers a choice among elimination periods of 30, 60, 180, 365 or 730 days. As with any insurer the more expensive policy would have the elimination period kick in at 730 days.

Elimination periods of six months to two years typically are chosen by people who are covered under their company's short-term policy. Just as variations in the beginning of the policy affect the cost, so does the termination period. The longer the policy is in effect, the higher the cost. A policy can run for a life-time, but most financial advisers recommend that the policy end at age 65, for a savings of about 15%. You should also be aware that the price of the premium increases as you get older.