In recognition of Disability Insurance Awareness Month, Principal Life Insurance published this list:

Myth #1:  I can rely on my savings.

Fact:  Even if you save 10% of your salary, one year of disability could easily wipe out many years of savings.

Myth #2:  Social Security Benefits will take care of me.

Fact:  Just 35% of the 2.8 million workers who applied for Social Security Disability Insurance benefits in 2009 were approved.

Myth #3:  A disability won’t happen to me.  I expect to stay healthy.

Fact:  Every 10 minutes, 490 Americans become disabled.

Myth #4:  I can rely on disability coverage through my employer.

Fact:  Group long-term disability insurance typically covers 60% of gross income, and benefits are usually taxable.  Can you afford more than a 40% pay cut?

Myth #5:  Individual disability insurance costs too much.

Fact:  The average annual cost is typically only 1% – 3% of what you earn.

Don’ t let the consequences of a disability derail your lifestyle and future plans. Purchase a long-term disability insurance policy now.

Megan and Ryan Collins are fictional characters created from stories we have heard from clients over the many years in the insurance business.  This is one of those stories:

Dr. Ryan Collins completed his general surgery residency in July of 2007 and began work as a surgeon in September, 2007. His new employer did not offer long term disability as a benefit so he knew he would have to purchase a policy himself.  With the income he was now receiving, it wouldn’t be a problem.  However, he was in no hurry, as he had purchased a policy while in his residency that offered a monthly benefit of $3,500.  “That should suffice for awhile,” he thought, “and besides, I’m not going to do anything that would put me at risk of becoming disabled.  His policy did have an option to purchase additional coverage without proof of medical insurability but he wasn’t eligible to exercise that option until the following April.

Megan was in their beautiful new home, bathing Jennie, their newborn, when the phone call came.  Michael had been in a car accident.  He was going to be okay, the nurse told him.  He suffered lacerations in both arms, but it appeared he would be alright.  The nurse didn’t feel it was appropriate to tell Megan over the phone about the severe nerve damage Ryan sustained in his right hand.

Ryan hadn’t planned for being out of work for 14 months while his hand “healed.”  The loss of income depleted any savings they had.  Due to permanent nerve damage, performing surgery in the future would be out of the question.  The good news was that the disability policy he did have ($3,500/month) did have an own-occupation definition of disability, which meant that his new job in family practice would not prohibit him from receiving benefits.

Granted, his new income of $10,000/month, coupled with his $3,500/monthly disability benefit was still a fairly good living.  However, it was significantly less than the $30,000 a month he was guaranteed as a surgeon. With bonuses and partnership shares in a year, he was looking forward to a monthly income of at least $40,000 a year from now. Between the mortgage on the new house and student loans, he and Megan would have to tighten their belts. Perhaps a smaller house in a different neighborhood would suit them better. If he had to, he thought, bankruptcy could definitely be an option.

Don’t let their story become yours.

Disability insurance is a must for professionals.  If your employer doesn’t offer it, protect yourself with an individual policy.  In many cases, even if you have employer-sponsored coverage, make sure your coverage is maximized with a supplemental individual policy.

Do you have a similar story you would like to share? Send it to stories@lifeinsure.com so we can share it with our readers.  Anonymity is guaranteed, as your stories will be told through the eyes of Ryan and Megan.

I came across this article at CNNMoney.com last week.  Published on Valentine’s Day, writer Gerri Willis offered some very good financial advice to couples.  As #2 is most relevant to this blog, it will be the only bullet point I expand.  For the complete article, visit http://money.cnn.com/2008/02/14/pf/saving/toptips/

1: Get your own credit history

2: Consider disability insurance

Your number one asset is your ability to bring home a paycheck. But what happens if there’s an accident, or you become ill, or maybe you can’t work anymore because of an injury?

That’s where disability insurance comes in. It provides you with a monthly income in case you can’t work. You may be able to purchase long-term disability insurance from your employer, or you can get it on your own.

According to an industry group, the Life and Health Insurance Foundation for Education, about one in five Americans will become disabled for one year or more before the age of 65.

Keep in mind you will pay more for a policy if you’re in a high-risk job or if you’re a smoker. And the younger you are, the cheaper the policy. To figure out how much you would need, check out a calculator at www.life-line.org and click on “disability insurance.”

3: Combine the best 401(k) features

4: Streamline your savings

I am happy to see that more and more financial writers are highly recommending disability insurance, as it is quite often overlooked by many people.  I firmly believe that disability insurance should be an integral part of most people’s financial plan.

During the current economic slow-down (I’m being polite), there have been an unprecedented number of newly-unemployed people.  I would imagine that many will start their own businesses rather than re-enter the job market.  For those who make on their own, many will base their businesses in home offices.

Even prior to our current economic scene, the U.S. Bureau of Labor Statistics estimates that there are more than 18.3 million home-based businesses in the United States.  There are as many as 43 million Americans running these entrepreneurial entities which range from business services to daycare to plumbing.  With increasing independence due to technology and growing income and tax benefits, The Home Based Business Report estimates that three in ten businesses are home based.

It’s a good thing, then, that disability insurers are finally recognizing the need this market segment has for disability insurance.   Up until recently, restrictions placed on these types of business made it difficult for home-based business owners to purchase this much-needed insurance.  Some of the insurance companies will now even recognize past income as an employee in determining the benefit amounts for these newly self-employed people.

I often hear this from prospective clients when they look at quotes for disability insurance. Very often, these same people recently purchased a term life insurance policy and are astounded by the difference in the cost between the two policies. “I can get a $1,000,000 term policy for $37.00 a month. Why does the disability policy with a $6,000 monthly benefit cost ten times as much?”

My short answer is, the higher the chance the insurance company has of paying a claim, the higher the cost of the insurance policy. The chance of one becoming disabled during his/her working years is far greater than the chance of dying during the period of a term life insurance policy. Therefore, the cost of the premium has to reflect this difference.

Additionally, the potential payout of a disability policy is usually much higher than a life insurance policy. For example, in the above mentioned disability policy, if the 30 year old policy-holder were to become disabled for the length of the policy term (typically to age 65), the payout would be approximately $2.5 million (without cost-of-living increases).

Myth # – The Government Would Pay Me

In this entry, I continue my exploration of the Five Myths about Disability Insurance discussed in an article I found in A.M. Best’s Consumer Insurance Center. This is the fifth and final entry of this series.

This is probably the biggest misconception we hear about disability insurance. Unfortunately, if you are depending on the government to provide you with benefits while you are disabled, you will be in for a rude awakening. According the article in the A.M. Best’s Consumer Insurance Center, only 39% of disabled workers who applied for Social Security Disability Income payments were approved in 2005. Even when they were approved, the average monthly benefit in 2007 was just $978. Adding insult to injury, it can take months to receive benefits.

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.

Proper disability protection typically requires individual disability insurance. With some disability policies, you can reduce your premiums by offsetting potential benefits with those paid by Social Security or State Disability.

To recap, the Five Myths about Disability Insurance are:

Myth #1 – I’m Healthy and won’t be disabled
Myth #2 – Your Home is your Biggest Asset
Myth #3 – Worker’s Comp Would Pay Me
Myth #4 – My Employer Would Pay Me
Myth #5 – The Government Would Pay Me

Myth #4 – My Employer Would Pay Me

In this entry, I continue my exploration of the Five Myths about Disability Insurance discussed in an article I found in A.M Best’s Consumer Insurance Center.

Many employees expect that their employers would pay them if, due to illness or injury, they were not able to work. However, only five states (California, Hawaii, New Jersey, New York and Rhode Island) require employers to provide short term disability insurance through payroll deductions. At best, short term disability would only cover a percentage of income for six months. There are no states that require employers to provide long term insurance to their employees.

As a matter of fact, most employers (70%) don’t offer group long term disability insurance to their employees and, if they do, benefits are typically 40-60% of the employee’s income. To make matters worse, the benefits are typically subject to income tax (if the employer pays the insurance premiums).

If you are part of a group disability policy, you’re at risk of losing the coverage if you were to become disabled for a period of time. The major downside of having group disability insurance is that if you are disabled for three to six months, your employer is not required by law to hold your position open for you. If your employer needs to fill your position and lets you go, you would lose your group benefits, including your long term disability insurance.

Proper disability protection typically requires individual disability insurance. Quite often you can supplement your group coverage with an individual plan. Some companies offer provisions to increase the coverage in your individual plan (without proof of medical insurability) if, due to changing jobs, you lose your group plan.

Myth #3 – Workers Comp Would Pay Me

If you are injured on your job, workers compensation insurance would cover your medical bills and a portion of your lost income. Most states require employers to purchase workers comp to cover such instances. However, as only 10% of disabilities are work-related, if you become disabled outside of work, you will not be covered.

A group or individual disability insurance policy typically covers approximately 60% of your income if, due to illness or injury, you are not able to perform the usual and customary duties of your occupation. For example, if you are injured while skiing and couldn’t work, you would not be covered under your workers comp policy, but you would be covered by an individual disability policy.

If you don’t have long term disability insurance, your income is at risk. Protect it with a good individual disability policy.

Myth #2 – Your home is your biggest asset

What is your biggest asset? The majority of people I speak with tell me their home is definitely their biggest asset, by far (I live in California, so I can understand this viewpoint). According to an article in A.M. Best’s Consumer Insurance Center, approximately 96% of homeowners have homeowners insurance (source: 2006 Insurance Research Council Poll). How much is this asset worth – $200,000, $500,000, $1,000,000 or more? Certainly, this is a large asset, but the largest?

Your largest asset is, in fact, your ability to earn an income. Without your income, you would most probably have a difficult time holding onto your other assets -  your home, your savings, cars, etc. How large is this asset? Let’s take a look at a 35 year old physician earning $200,000 annually. If she were to become permanently disabled at age 35, she would lose out on approximately 30 years of income (based on a retirement age of 65). Even without factoring in inflation, her loss of income would be about $6,000,000. Her total loss would be compounded if she were to dip into savings, retirement accounts, cash-value insurance policies, etc.

Because of this myth, 96% of Americans protect their homes with homeowner’s insurance, yet only approximately 30% of Americans protect their incomes with long term disability insurance (according to the Social Security Administration). Why don’t a larger percentage of people purchase this type of insurance? This myth is one of the reasons. Most people don’t calculate what their lifetime earnings might be.

In the next three entries, I will present the other myths that keep people from protecting their most valuable asset -  their ability to earn an income.

In speaking to clients and prospective clients on a daily basis, I often hear the same reasons why people feel they don’t need disability insurance. I read an article today at A.M Best’s Consumer Insurance Center titled Five Myths about Disability Insurance and found these myths mirrored the reasons people tell me they don’t need the coverage. As I would like to fully explore each myth presented in the article, I will cover one per blog entry.

Myth #1 – I’m Healthy and won’t be disabled

According to a recent study, most people estimate they have only a 6% chance of becoming disabled during their working years yet; every statistic I have ever seen on the subject tells me the chance of becoming disabled is much greater than people suspect. Here are a few statistics:

• 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.

Sources:
1. Gallup survey, conducted for UNUM Corporation (508 respondents, aged 30 to 65), reported by Best’s Review.
2. “Why Disability” booklet, published by National Underwriter.

For more statistics, visit http://www.protectyourincome.com