I speak with many prospective clients who consider self-insuring against disability (e.g. relying on savings, spousal income and/or credit). In every one of these cases, these individuals all make the following two mistakes:

• They minimize the degree of the risk (i.e. how likely it is that they will become disabled) and;
• They underestimate how financially exposed they would be if they were to become disabled.

In regard to the first point, most people consider that a permanent disability is something that will never happen to them. However, the statistics tell us otherwise.

• If you’re under age 35, chances are one in three that you will be disabled for at least six months during the course of your career.
• Men have a 43% chance of becoming seriously disabled during their working years.
• Women have a 54% chance.
• At age 42, it is four times more likely that you will become seriously disabled than that you will die during your working years.

Regarding the second point, if, at age 40, you are earning $200,000 per year and you were to become permanently disabled, the loss of income (without factoring in inflation or increased earnings) would be $4,000,000 through age 65 (the typical term of a long-term disability policy)

Self-insurance works when it comes to handling predictable, low-percentage-type risks that carry modest financial exposure. However, the risk of disability is quite unpredictable and, as you can see from the above information, it is a relatively high-percentage-type risk that carries much less-than- modest exposure.

You can choose to retain the risk (self-insure) or to transfer the risk by purchasing a long-term disability policy. When presented with these facts, most of my clients choose the latter.

This is a question we hear quite often from our clients: Why do I need personal disability insurance? Won’t social security pay me disability benefits?

Unfortunately, most who apply for benefits do not receive them. On average, 65% of people filing claims do not receive any. For those who do receive benefits, the wait can be unbearable.

According to an article in USA Today the Social Security Administration faces a record — and rapidly growing — backlog of appeals by people who claim they are too disabled to work. Through June, it had just over 745,000 cases pending, and the wait for a hearing averaged 17 months, also a record.
Claimants in some parts of the country must wait up to 31 months, according to the agency. “People have died waiting for a hearing,” Social Security Commissioner Michael Astrue says.

The agency says the backlog doubled in six years and could reach 1 million by 2010.

In another USA Today article, they report that of 2.5 million people who file disability claims annually, nearly two in three get denied initially. If they pursue a federal hearing, they join about 745,000 others whose appeals are backlogged. As of June, their average wait for a decision was 529 days. The lengthy waits lead to bankruptcies and foreclosures, drinking and drugs, depression and divorce, even suicide, according to claimants, their representatives and employees of the Social Security Administration.

With the recent turmoil in the financial markets, we have been seeing more and more questions about the importance of the strength of the insurance company.

There are numerous factors involved in choosing a disability insurance company but the primary factor is financial strength:

• “Who is backing the claim if I get disabled?”
• “Which of my choices of insurance companies is the most likely to be there to pay me if I’m disabled for the next 30 years or so?”

How do you tell?

First of all, look at their financial strength ratings from AM Best and Co., Standard & Poor’s, Moody’s and Fitch. Make sure the company has at least an A+ rating from Best’s and AA (Aa) from the other services.

Among the disability insurance carriers we currently like the strength of Berkshire Life (a subsidiary of the highly rated Guardian Life Insurance Company).

BusinessWeek had an online article this week urging people to get disability insurance.  It touched on the no no of touching retirement accounts.

As the article stated:  “Digging into retirement accounts before retiring is a big no-no. Americans should heed two methods to safeguard savings: set aside a liquid cushion and buy disability insurance.”

Also the article went on to say:  “If you have the right disability protection in place, then you won’t have to worry about liquidating or discontinuing your retirement savings because of a debilitating injury or illness.”

The best endorsements for disability insurance are the people who have collected claims and saved their financial lives.  An interesting survey was reported in U.S. Insurance News.

Here are some of the interesting facts:

• Most claimants said they did not have any problems with the claims process, and of those who did, the majority had their problem resolved satisfactorily.
• While disability insurance carriers surely like to hear of these approval rates, even better is the acknowledgement from claimants that their disability coverage prevented them from suffering a financial hardship—a key selling point for disability insurance carriers
• Accordingly, 96 of claimants said it is at least somewhat likely that they would have suffered financial hardship had they not received disability insurance benefits after suffering a disability. Two-thirds (67 percent) said it is very or extremely likely that they would have suffered financial hardship.

The well known online and offline financial publication, Kiplinger’s, today in an online article entitled, “Your Essential Emergency Kit” to make sure you have disability insurance.

Here’s a quote from the article: 

“You’ll also want disability insurance, just in case something happened to you that prevented you from working for a time. Many people get some form of disability insurance through their job, but you’ll want to make sure it’s enough.”

The article is a good one including other tips for preparing for emergencies including what to do with important documents, setting up emergency kits and more.  I recommend it.

A recent Newsweek article quoted an “insurance planner” who doesn’t buy disability insurance for himself.   Here’s the quote:  “The chance that you’ll ever be too disabled to earn a living is far less than you’ll hear from your insurance salesman. Before you buy, think about your lifestyle. “If you could do your job from home, you’ve reduced to a minuscule percentage those things that could keep you from earning a living,” says ____ an insurance planner who doesn’t buy disability coverage for himself.”

The statistics about disability are clear and obvious.   See the protectyourincome.com website’s education center to see the facts. 

What’s most objectionable about this article is that someone might follow this advice and then become financially ruined because their largest asset, their income, would disappear in case of a serious, long term disability.

There was an article on msnbc.com about Ed McMahon and the effect of injury and illness on one’s financial health. 

There were numerous points made but the key one was to “Obtain disability insurance. This should rank with life insurance as a secondary financial priority.”

Other points made included:

Be rigorous in reviewing potential long-term disability policies. Such contracts have numerous options; so carefully check occupation, income, recovery, and cost-of-living clauses. Access disabilitybenefits101.org for an independent discussion of disability benefits.

* Choose a long-term rather than short-term policy if your budget is limited. Long-term disabilities can create more expensive financial hardships.

* Review the financial strength of the insurance company before signing a short- or long-term policy. Check their ratings at ambest.com.

The Dallas Morning News asks today:  “Do you have enough disability insurance to cover you if you can no longer earn a living? That ability is your greatest asset.”

We couldn’t agree more.