What’s the Point of Disability Insurance?
Every month, Americans pay bills for housing, cell phones, student loans, credit card bills, medical insurance, and so on. There are also weekly and even daily expenses for food/groceries, child care, gas, and so much more. For most people, their paycheck is what fuels this continuous flow of money. We build our lives and expenses around the money we earn from our jobs.
But are you protecting your paychecks with disability insurance coverage?
What is Disability Insurance?
Disability insurance will typically replace a portion of your weekly or monthly salary in the event you are unable to work due to an injury or sickness for an extended period of time. Disability insurance is typically broken down into two categories: short-term disability and long-term disability. Short-term disability coverage typically lasts up to 26 weeks, but can sometimes extend out to 52 weeks of coverage, depending on the policy design. Long-term disability coverage, on the other hand, typically takes effect between 90 to 180 days of continual disability and can continue until you either return to work, the maximum policy duration ends, or until you reach retirement age, depending on the terms of the policy.
Why Would I Want to Pay for Disability Insurance?
Because our paychecks only stretch so far, we have to make choices on what does and does not fit into our budget. If your employer already offers either short-term or long-term disability coverage for free, then that is free coverage for you. But if you have to pay a portion of the cost of coverage or for the full cost of coverage, then why should you divert money from your budget to pay for disability coverage?
According to “Disability and Death Probability Tables for Insured Workers Born in 2000” by the Social Security Administration, insured American workers who were born in 2000 have a 25 percent probability of becoming disabled between age 20 and normal retirement age1. In a Federal Reserve Board’s 2016 Survey of Consumer Finances, it was found that of the families surveyed, “only about 40 percent of families have liquid savings equal to three or more months of expenses, and just 28 percent have more than six months,” and nearly 1 in 4 families surveyed did not have $400 in liquid savings to pay for an unexpected bill or expenditure2. In 2017, the American Council of Life Insurers release a report titled “Assessing Americans’ Financial and Retirement Security” and found that 35 percent of Americans needed to improve their financial security significantly, and, of those Americans who needed significant financial security improvement, only 29 percent had access to disability insurance income other than what is offered by Social Security3.
If you do become disabled for an extended period of time, you could apply for disability coverage through the Social Security Administration, but keep in mind that this does not work out for everyone. According to the Social Security Administration’s 2020 “Annual Statistical Report on the Social Security Disability Insurance Program,” the average final award rate of disability benefits between the years 2010 and 2019 was 31 percent, with only an average of 21 percent of those benefits being approved and awarded at the first initial claims level4. When appealed, only an average of 2 percent of claims were approved at the reconsideration stage, and 8 percent were approved at the hearing stage4. Over this timeframe, the average disability claims denial rate was about 67 percent4.
Additionally, the “What You Should Know Before You Apply for Social Security Disability Benefits” fact sheet indicates that “your medical condition(s) must have lasted, or be expected to last, at least 1one year, or be expected to result in your death.5” This sheet also indicates that the average processing time for a disability claim is about three to five months, depending on how quickly you can get access to your medical records and sufficient evidence for Social Security to make their decision5.
With all of this in mind, think of the different expenses you have throughout your day, week, and month. Your income is the source of money that pays for your groceries, phone bill, rent/mortgage, utilities, credit card bills, home and auto insurance, and other expenses. If you can’t work due to an injury or sickness, do you have enough money in your bank account to pay for these expenses? And can you sustain those payments for however long you will be out of work?
You have auto insurance to cover repairs and/or medical expenses in the event you are involved in an accident. You have home owner’s/renter’s insurance in the event your home or apartment is damaged or destroyed and you can repair, replace, or rebuild. You have health insurance to help pay for medical costs if you are sick. Your paycheck is the source of money that pays for almost everything in our daily lives. Are you protecting your paycheck like you protect your home, car, and health?
If you are interested in discussing your options for short-term or long-term disability coverage, contact the experts at ARC who will find a plan that works for your budget and your situation, not against it.
- Social Security Administration, Disability and Death Probability Tables for Insured Workers Born in 2000 https://www.ssa.gov/oact/NOTES/ran6/an2020-6.pdf, Table A.
- Federal Reserve, “Money in the Bank? Assessing Families’ Liquid Savings using the Survey of Consumer Finance,” FEDS Notes, November 19, 2018 https://www.federalreserve.gov/econres/notes/feds-notes/assessing-families-liquid-savings-using-the-survey-of-consumer-finances-20181119.htm, Table 1
- American Council of Life Insurers, Assessing Americans’ Financial Retirement Security, unpublished data from study released in September 2017 as https://www.acli.com/-/media/ACLI/Public/Files/PDFs-PUBLIC-SITE/Public-Industry-Facts/Assessments_Report_082917.ashx?la=en
- Social Security Administration, Annual Statistical Report on the Social Security Disability Insurance Program, 2020 https://www.ssa.gov/policy/docs/statcomps/di_asr/2020/di_asr20.pdf
- Social Security Administration, Factsheet https://www.ssa.gov/disability/Documents/Factsheet-AD.pdf