The Extraordinary Importance of Disability Insurance... Paying the Bills Even if You Can't Work
Financially, a disability is significantly more expensive than death. With a disability, income is reduced or eliminated and expenses increase. It makes sense to protect yourself and your family when the cost is low.
—Kevin B. Perlberg, CFP®, Susan S. Brousseau, CLU, ChFC, CFP®
Many physicians and other successful business professionals overlook one of the most significant threats to their long-term financial success—a disability. The economic effects of inadequate disability insurance coverage can be more costly than a divorce, a lawsuit, or the premature death of the family’s primary earner.
Responsible financial planning includes planning for the best possible future while protecting against the worst possible events. No one ever plans on becoming disabled—though nearly one-third of people age 25 or older will have a disability of three months or longer at least once in their lifetime. (cdc.gov).
Within the professional context, a disability is an illness or injury that prevents the insured person from earning an income in his or her occupation. Disability insurance is frequently designed to replace a portion of the insured person’s income—usually between 45% and 65% of gross income, tax-free—though the policies can be supplemented.
The Need for Disability Insurance
Should the family breadwinner die or become disabled, she or he will be unable to provide any income for the family. However, if she becomes disabled, she will still need to be fed, clothed, and cared for by medical professionals or family members. In many cases, the medical care alone can cost hundreds of dollars per day. Thus, with a disability, income is reduced or eliminated and expenses increase. In contrast, in the case of premature death, the deceased earner is no longer an expense to the family and with a well-planned estate, a life insurance policy pays out a lump sum to help the family navigate the financial challenges that ensue.
A disability can be a devastating turn of events and can lead to problems with creditors, and even bankruptcy. How serious are the threats of disability? Consider the following statistics:
- Among wage earners, 30% will experience a long-term disability (90 days or longer) before they reach age 65. (U.S. Social Security Administration, Fact Sheet February 7, 2013; Council for Disability Awareness, Disability Divide Consumer Disability Awareness Study, 2010.)
- In December of 2010, there were more than 2.5 million disabled workers in their 20s, 30s, and 40s who were receiving Social Security Disability Insurance benefits (SSA.gov).
- Medical expenses contributed to 62% of all personal bankruptcies filed in the U.S. in 2007, a nearly 50% increase over results from a similar 2001 study (U.S. Social Security Administration, Fact Sheet February 7, 2013; Council for Disability Awareness, Disability Divide Consumer Disability Awareness Study, 2010.).
- Seven of 10 homeowners (69%) in foreclosure had suffered significant medical distress in the two years preceding foreclosure (Get Sick, Get Out: The Medical Causes of Home Mortgage Foreclosures, Health Matrix. 2008; 18:65-104).
If you are age 50 or younger, or if you are older than 50 and have pre-college age children, you should consider the appropriate disability insurance policy to be an absolute necessity.