Why Extra Disability Insurance Is a Good Idea
Do you need disability insurance?
If you’re a young working person the answer is probably yes, financial planners say. The reason is simple: Most people would be financially devastated if they found themselves unable to work for a long period of time.
The chances of that happening are fairly remote--only about five or six people in 1,000 will make a long-term disability claim in any given year, experts say.
However, the purpose of insurance is not to protect you from things that are likely to happen. It’s to protect you from things that would have terrible consequences in the event they do happen. That’s why about 70% of Americans own life insurance even though their chances of dying young are even more remote than their chances of becoming disabled.
Before you go shopping for a disability policy, however, you should know that you probably already have one. The Social Security Administration runs a long-term disability insurance program that covers many workers.
A small number of states--California, New York, New Jersey, Hawaii and Rhode Island, to be precise--also run state disability programs, says Richard J. Miller, senior counsel of disability insurance at the Health Insurance Assn. of America. And a good portion of employers also offer some sort of disability coverage to their workers.
So why worry?
For one thing, the government plans have time, payment and other limits. The maximum for California disability, for example, is $336 a week, and it lasts only 52 consecutive weeks in most cases. The national disability insurance program pays less, although it doesn’t have a time limit.
Meanwhile, employer-paid disability plans are often short-term. If your disabling illness or injury is lasting, there’s a good chance that you’ll only have Social Security’s disability program to fall back on. But that program requires that you be unable to work at any job at all.
The bottom line is that you probably need to buy some coverage--either through a voluntary group plan at work or individually--to fill the gap between what you’d get and what you might need.
Where are the gaps? For most people, the most serious gap arises if they are disabled for a year or more.
For the first year, full-time employees are generally covered. Roughly 87% of full-time employees in medium and large companies have short-term disability coverage through work; 96% in state and local governments; and about 64% in small companies.
By and large, the short-term plans guarantee that you’ll receive an amount equal to 60% of your working wages if a non-work-related illness or injury prevents you from doing your normal job. (If your illness or injury was caused by work, you’re likely to have a workers-compensation claim instead.)
However, if you are covered by a state program, your private insurance would deduct an amount equal to the benefits paid under the state insurance plan. For instance, if you collect $336 per week in California and your normal income amounts to $1,000 per week--$52,000 per year--and you have disability insurance that pays a 60% benefit, the disability insurance would pay $264 per week--the difference between the state benefit and $600 per week (60% of your $1,000 weekly wages).
On the longer-term end, however, the picture is not pretty.
If you are thinking of relying only on Social Security for the long term, note that it has a five-part test to determine whether you are disabled. These questions include whether you can do the work that you’ve been doing for the past 15 years and whether your disability is serious or on the agency’s list of “disabling impairments.”
The killer question--the one that eliminates the vast majority of applicants--is this: “Can you do any other type of work?” If you can do any other type of work and earn more than $500 a month at it, you are likely to be denied Social Security disability benefits.
But note too that many private long-term insurers also expect you to do any work you are capable of after a few years.
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Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or send a message to kristof@news.latimes.com on the Internet.
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The Going Rates
Generally speaking, women pay more than men for disability insurance. An individual policy costs more than a group plan. People in physical professions tend to pay more, as do Californians and Floridians because of more disability claims in those states. Here are a few sample annual rates for workers with annual income of $40,000:
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California Illinois Personal description rate rate Male, banker, age 42 $130 $102 Female banker, age 42 $162 $127 Male construction worker, age 42 $217 $171 Female construction worker, age 42 $271 $213
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Source: UNUM Life Insurance Co. of America
