Nobody likes to think about what life would look like should disability strike. But the reality is that one-third of all Americans between the ages of 35 and 65 will become disabled for more than 90 days, according to the American Council of Life Insurers. One in seven workers will be disabled for more than five years.
And while many people think that disabilities are typically caused by freak accidents, the majority of long-term absences are actually due to illnesses, such as cancer and heart disease. The loss of income can be so devastating that 46 percent of all home foreclosures are caused by a disability, according to the U.S. Department of Housing and Urban Development.
By properly planning now, you can help your clients mitigate the financial pain that can come with a sudden disability. Help them understand their risks and options by sharing this story with them:
Once upon a time there was a man who decided to gather all of his assets together in order to determine his net worth. Arriving at a value for most of his property was fairly easy, but one item, in particular, was difficult to appraise; it was a money-making machine. The man simply had to turn it on and it created money. Because it was difficult to arrive at a true value, the man insured all of his assets, except the machine. But, in time, something terrible happened; the machine was irreparably damaged in an accident. Sadly, it was no longer able to make money. The man was distraught. Even though his other assets were insured, within a short period of time he was bankrupt. He had failed to insure his most important asset -- his ability to make money.
The story may sound like a fairy tale gone bad, but it strikes closer to home than you may think. Every worker in America is his or her own money-making machine, so to speak. And few have taken care to properly insure it. Your machine is really your ability to get up every morning and go to work. You are a money-making machine and you are your own greatest asset.
Now that you've got their attention, ask your clients:
o What would happen to your family needs and finances if you experienced a heart attack or serious car accident and were no longer able to work?
o How much money would you require and where would it come from?
o Let's take a look at your workplace disability benefits. Often, these employer-provided plans cover just 50 percent to 60 percent of your income.
Can your family survive on half a paycheck?
Determining the Need
It seems that many people who thoughtfully consider decisions about life insurance and health-care coverage take little or no action to obtain adequate disability insurance. Perhaps it's easier to imagine getting sick or dying as opposed to becoming disabled. Or maybe people simply don't realize that there is a much greater chance of becoming disabled during one's working years than there is of dying. The probability of experiencing a disability versus death doesn't drop significantly until the mid-50s.
A typical 45-year-old American earning $50,000 per year will make well over $1 million before reaching age 65. And that's not including any pay increases along the way. So how do you insure such a valuable asset? Approximately 50 percent of companies help their employees through group disability insurance benefits. Those employers typically provide a benefit equal to 60 percent of the employee's gross pay if the employee becomes disabled. Even though this is helpful, the average worker needs more insurance. Approximately 80 percent of one's monthly expenses are fixed. This means that the need for income to cover those expenses will continue, even if one is disabled. There is an obvious disparity between 80 percent of net expenses and 60 percent of gross pay.
The 1985 Commissioners Individual Disability Table, below, shows the odds and duration of disabilities at various ages.
So what's the solution? Additional disability insurance may be available through your client's employer. If not, disability insurance purchased through a private insurance carrier may be the answer. Workers are often able to fill the gap in coverage by applying for their own disability policy. But all individual disability policies are not the same.
Cost, benefits and policy provisions vary greatly, depending on the policy and the insurance carrier. The quality of the policy and the insurance company are very important, since a plan should be tailored to meet your client's individual needs. In addition, a policy should be coordinated with any other existing coverage the client may have. Here are some key characteristics to look for:
o Definition of Disability
o Residual Disability
o Ability to Renew
o Elimination Period
o Waiver of Premium
o Capital Sum Benefit
o Rehabilitation Benefit
o Exclusions & Limitations
o Optional Benefits
Choosing the insurance company that is best for your client may be as important as the policy itself. Insurance companies are not equally rated. Researching each company's financial strength, through independent rating companies such as A.M. Best, Standard & Poor's, Moody's, Fitch or Weiss Ratings can provide you with an assurance that a particular company will be able to meet the client's needs at the time of a claim.
Once you've decided on one or more insurance companies from a financial-strength standpoint, a comparison of pricing and benefits is next. And, if you are not a fully informed insurance expert, don't forget about guidance and service provided by a local agent. This can be particularly helpful, especially when it comes to understanding and evaluating policy provisions and choices.
Helping clients understand the need to insure their ability to work could well be the best advice you'll ever provide. Undoubtedly, death is the ultimate adversity, often sudden and certainly final. But a serious disability often forces one to helplessly watch, unable to stop the depletion of assets or ease the discouragement of loved ones. Therefore, evaluating your client's personal disability needs and purchasing the policy that best fits is without question worth the time, effort and money.
MARIE SWIFT is president of Impact Communications (www.impactcommunications.org), a marketing and communications firm for independent advisors.
ALAN CAPPINGER (CHFC, CLU, CFP, CFE), is founder of the Denver-based Heartland Institute of Financial Education (www.hife-usa.org), a non-profit that promotes financial literacy through workplace education. A certified financial planner, Alan also holds chartered financial consultant and chartered life underwriter designations.