One in Seven

by Gary Foreman

Dear Dollar Stretcher,
I've been reading your articles on insurance. A lot of them focus on the need for insurance in the event of death. How about the need for insurance in the event of disability? Not only is the income from the disabled lost, there may be related medical and care-giving fees incurred as well. How should we view the risk of disability, and calculate the coverage needed subsequently?

Eveline asks a good question. And, all too often, it's one that people don't consider until it's too late. Very few of us would go without fire insurance. Yet, most people never even think of buying disability insurance. Unfortunately, one in seven workers will be disabled for a period of five or more years before they reach age 65. Far fewer people will suffer a house fire.

A common misconception for many is that they're already covered in case of disability. But many employer-sponsored plans will only pay for a short period of time or a smaller amount than your wages.

Social Security offers two programs that can help if you're disabled: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). SSDI will pay up to a maximum of 80% of your pre-disability income. The best way to estimate what Social Security would pay is to contact them and request a Personal Earnings and Benefit Estimate Statement (1-800-772-1213). Although it takes a little effort, it's the only good way to get an accurate benefit amount.

Counting on Social Security alone is risky. According to The Social Security Forum, more than half of first-time applicants are rejected by Social Security. And, it can take up to a year for them to decide whether to pay you SSDI.

So even if you do have some coverage, having enough cash to pay your bills until the insurance kicks in could be a problem. You'll not only want to consider how much income you'd be getting, but when you'd receive it and for how long.

The amount of insurance that's advisable is different for everyone. It's not as simple as taking what you currently earn and using that figure. Your expenses can also change dramatically. So you'll need to estimate changes to both income and expenses.

You will spend less on some things. After all, if you're not working you won't need work clothes. Lunches at home are cheaper than lunches out. And it might be possible to get rid of that second car. Every case is different. But, new expenses can more than eat up any savings. While some disabled persons are able to care for themselves, others require in-home nursing care or even a move to a nursing home. It's not unusual for nursing homes to charge $50,000 per year for a patient. The healthy partner, if there is one, could be too busy working to complete all the household chores so non-medical help could be required, too.

Because no one knows exactly what the future will hold it's hard to decide whether you need additional disability insurance and, if so, how much is appropriate. The best you can do is to think of some things that could happen and think about how you'd react to them.

A good place to start is to consider a "worst-case" scenario. Take a look at your finances and estimate what would happen if an adult had a stroke and it was necessary to move them into a nursing home. Include both income and expenses. Estimates are fine. You don't need to be overly accurate. The goal here is to just get a feel for how tough it would cost and how much income would be needed to keep things going. Prepare a basic budget with the revised income and expense figures.

You'll probably want to also do a scenario that's not quite so drastic, perhaps where someone is disabled for a year or two. Under this circumstance you'd expect that the disability income required would be significantly less.

Even using rough estimates, this exercise will take a couple of hours. But, I've yet to see a chart that can account for all the different factors that make your situation unique. Everything from dependent children to where you live will affect your needs.

After you have some idea of how much coverage you're looking for it's time to consider what a policy will cost. Rates will vary widely. A number of factors will affect the rates. Obviously, your age will have a difference. The premium will increase if you need to begin receiving checks shortly after the disability occurs. Do you expect payments for a certain period of time? Say five years? Or until you reach age 65?

Another major determinant of your premium is the definition of 'disabled'. Are you disabled when you can't work at your specific profession? Or do you have to be unable to work any job to qualify. For instance, if a surgeon loses use of his hands, he's lost a significant income. But under some policies, if he's able to work as a janitor, he's not considered disabled. For some people taking a step down in income is no big deal. For others it's a disaster.

We took a look at rates quoted through The Hartford Life Insurance Co. so you'd have some idea of what coverage costs. The plan we reviewed would replace $4,000 in monthly income and has a 90-day waiting period before you receive any money. For a worker under age 30, the annual premium would be $224. For someone between age 40 and 49, it runs $492 per year. The coverage is for someone who's totally disabled. It covers your specific occupation for the first two years and then any occupation thereafter.

There's a good chance that you won't take the time to go through this exercise. And there's also a six in seven chance that you won't need to. But if you happen to be that seventh person, you face severe financial hardship if you're not prepared. Thanks to Eveline for an excellent question.

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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