Disability income insurance is one of the most unappreciated of employee benefits.
Activists don't cry for broader disability coverage and there aren't any public service announcements or massive media campaigns to put a spotlight on the need for income protection.
But the news of the U.S. full year savings rate dropping into negative territory in 2005 for the first time since the Great Depression is just one sign of how close debt-ridden Americans are to financial distress and why disability insurance is more important now than ever before.
Excluding mortgage debt, American consumers now owe an average of $11,669, up 13% from 2004, according to the credit-rating firm Experian Information Solutions Inc., Costa Mesa, Calif. Living paycheck to paycheck has become a way of life for many, and affluent families are not exempt from our lifestyle of conspicuous consumption.
A recent Wall Street Journal article asserted that while employees have greater income, the share of their money that is devoted to transportation and housing has increased dramatically over the years. According to the article, more than 52% of U.S. household expenditures are going to basics such as shelter and transportation, up from less than 41% in 1950–not to mention the escalating cost of college education and mounting credit card debt.
Workers tend to put whatever spare change they can find toward the cost of rising health insurance premiums. In the event of a serious illness or injury, they reason, at least their hospital bills will be covered. But who will pay their mortgages, car payments and children's college tuition fees?
Disability income insurance should be a cornerstone of the financial protection package, but despite the obvious need for income protection, disability insurance is one of the less frequently offered benefits. Fewer than half of workers nationwide can get either short-term (40%) or long-term (30%) disability insurance through the workplace, according to the U.S. Bureau of Labor Statistics.
While practically all large companies–those with at least 5,000 workers–offer disability coverage, fewer than half of firms with 100 workers or less do, according to LIMRA International, Windsor, Conn.
The reasons for lack of disability coverage vary. Many employers think they can't afford to offer disability insurance, especially during this era of sharply rising costs for meat-and-potatoes benefits like health insurance and retirement plans. Others simply don't believe their employees would be interested.
What's more, disability insurance is a complex product. Many employees don't understand it. Often people are skeptical of insurance. After all, it's not something you can hold in your hands–just a promise made on paper.
Others overestimate benefits that they will receive from workers' compensation or Social Security in the event of a disability. What they probably don't realize is more than half of claims are denied on the first application, according to data from the Social Security Administration. Those that do succeed often yield benefits that are too low to support a significant portion of a worker's income.
