When people think of insurance, they think of life insurance, or auto insurance, or homeowners insurance. Rarely do they think about disability insurance (DI), yet this is a vital part of a person’s insurance portfolio. The odds of a person experiencing an extended disability due to illness or injury during their working life is remarkably high: about 25% of the population will suffer a disability that will put their income at risk. Yet, when people are told about disability insurance, they see it as an expense rather than a way to mitigate their risk of losing their income. So let’s take a look at some of the myths surrounding disability insurance that relegate this very important insurance to the bottom of their priority list of risk mitigation.
About 33% of employees do have some disability insurance through their employer. For those fortunate 33%, the first myth is believing this is all the DI coverage they need; however, that is often not the case. Many group DI policies are very restrictive and only pay if a person cannot work at all in any occupation. That means, for example, if a surgeon develops debilitating arthritis in her hands and can no longer perform surgery, but can still work at another occupation, say teaching, then the group policy will not pay a benefit to her. Further, if the employer is paying the premium for the policy with pre-tax dollars, any benefits paid become taxable income. Given that DI policies only pay between 60% and 66% of their gross salary, taxing this benefit can drop the net proceeds by over a third. Both of these issues make group DI policies a less than ideal alternative to individual DI policies. And the remaining 67% of uncovered employees have no income replacement in the event they cannot work due to illness or injury.
The second myth is the idea that dying prematurely is more likely than becoming disabled and losing income during one’s working years. In fact, the risk of serious disability due to injury or illness is surprisingly high. In fact, that the risk of a serious disability that puts somebody out of work from the age of 20 through retirement at age 67 is about 25%. And according to a report by Unum Insurance, 60% of their disability claims are for women! Compare this to the risk of dying prematurely: approximately 17% for males between the ages of 25 and 64 and about 11% for females in the same age bracket.
The next myth confuses workman’s compensation insurance with disability insurance. These are completely different products: the former is designed to provide wage replacement and medical benefits resulting from an injury or illness that is directly caused by activities in the course of employment. DI provides wage replacement, typically up to 66% of income for any injury or illness that precludes a person from working for an extended period. Fewer than 5% of disability claims are directly work related and are covered by workman’s compensation; 90% of disability claims are the result of illnesses that are not connected to employment, and therefore are not eligible for workman’s compensation. The point here is that you’re chance of suffering a non-work related disability that puts you out of work for an extended period is at least 18 to 19 times greater than suffering a work-related injury or illness. Therefore, workman’s comprehensive insurance is not a substitute for disability insurance.
