Disability income insurance can be a difficult topic for many of our clients to understand because of the misperceptions they have about it. They initially view the premium dollars as competing with their lifestyle dollars. We try to overcome this by making the discussion part of an overall plan.
The first misperception is around the definition of disability income insurance. Is it disability income, or is it income replacement? It’s both of those, but what does that mean? Disability insurance (DI) means many things to many people: It means the mortgage payment (clients can stay in their homes), it means food on the table, it means birthday parties and college education for the children. It means they can maintain their assets. It means dignity. Having a disability has been described as a living death. At least if you die prematurely you don’t have to watch the destruction of your poor planning.
Our clients are in denial. It can’t happen to me, they say. Statistically, they’re probably right — but if it happens to them, all of those statistics don’t matter. Let’s take a closer look at the chances of becoming disabled.
- Just over one in four of today’s 20 year olds will become disabled before they retire.1
- One in eight workers will be disabled for five years or more during their working careers.2
- Over 36 million Americans are classified as disabled. More than 50 percent of those disabled are between the ages of 18 and 64.3
- About 795,000 strokes will occur this year.4
How much coverage?
Once you’ve established that disability insurance is relevant for your clients, the next question becomes: What’s the right amount of coverage to have? First, it’s important to realize that, for most clients, their ability to earn an income is their most valuable asset. Everything in their lives, from a financial standpoint, rests on their ability to earn an income.
The second aspect of this part of the discussion is answering the question: When someone becomes disabled, do their costs go down, stay the same, or go up? If you’ve ever known someone who was disabled, costs go up. Then, ask yourself this: Will the insurance industry insure 100 percent of someone’s income? The answer, clearly, is no. So, the right amount of DI coverage to have is the maximum that our companies will issue.
A company won’t over-insure someone’s income. If they did, they would create a moral hazard. We can help our clients understand this by taking them through an accident in their minds. After the image is clear, we ask them, “If you could go back to three days before the accident, as if the accident hadn’t occurred but you knew it was going to, how much disability income insurance would you add?” Almost to the person, the answer is “the maximum I could qualify for.” Why? Because it’s the only logical answer.
An unprotected asset
Another important reason to discuss the need for protection is the changing economics of most American households. So many people are spending more than they are making. For most paycheck-to-paycheck families, a disability would be devastating. Prospects we meet between the ages of 50–60 are realizing that they will have to work until 70 or beyond. They are buying disability insurance realizing that their income is running the show.
The truth is that most American workers’ incomes are not protected. Sixty-nine percent of workers in the private sector have no long-term disability insurance, and about 100 million are without private disability income insurance.1 About 31 percent have a group long-term disability plan through their employer and think they are adequately covered, but the income replacement ratios are only 50–60 percent and subject to a benefit cap. Group disability insurance may also create the Executive Benefit Gap, where the group long-term plan may only cover 60 percent of income to a $10,000 cap.
The definition of covered earnings needs to be clarified in a group plan. Does that group disability income insurance entirely cover that employee’s salary, commissions, bonuses and/or 401(k) plan? With group coverage, the payout also may be less than expected and the definition of disability may change.
Coverage for business owners
Business owners face additional types of disability risks. They need to balance the needs of their business budget with their personal budget. They are responsible for costs including lease payments, employee wages, benefits, taxes, insurance, utilities, and on and on.
Business owners are notorious for putting all of their money back into their business. They don’t understand that, in order to make their business strong, they need to protect it. They need to build assets outside of their business. One area of that protection is individual disability insurance. Another is business overhead insurance.
If a business owner becomes disabled, think about all of the challenges that he or she faces. Their bills still keep coming in. They may have to pay someone to take on their responsibilities. If they have to take an income for themselves in addition to paying the person that is replacing them, they can put an enormous burden on the company’s cash flow, not to mention the potential loss of loyalty of the remaining employees. Nobody likes to work overtime to provide an income for someone who is not working.