Remember when you were in school and read Aesop’s Fables? Aesop wrote some pretty popular short stories that would have a good moral to them. One of his stories was about the goose that laid golden eggs!
A man and his wife were blessed to have a goose that would lay one golden egg each day – unfortunately, they felt they weren’t getting eggs fast enough and so they decided to access the gold themselves.
Upon cutting the goose open, however, they didn’t find any gold, just normal goose-guts!
What the man and his wife should’ve done is be content with what they had – but let’s look at the story from a different angle – they should’ve purchased some insurance on the goose!
Now hang with me here a second – can you really buy goose insurance? No, but relate this to your own life – do you have a goose that lays a golden egg?
The answer is YES! Yes, you do. That goose is you!!
Your ability (the goose) to earn an income (the golden eggs) each and every day is an extremely important factor in reaching your financial goals!
No one enjoys talking about insurance, but it’s an important piece to the financial plan so insurance is something that should be reviewed! So let’s take a look at how disability insurance will protect the goose!
Disability Insurance Protects Against the What Ifs
What is Disability Insurance? Well, basically these policies provide income replacement for those who are unable to work.
Generally you will get paid a certain percentage of your take-home pay if you are unable to perform functions of your current occupation.
If you get sick or hurt for a period of time, this insurance will kick in and pay you a salary!
Depending on whether your employer picks up the tab or not on a group policy will determine if the benefits are taxable.
If a disability insurance policy is paid by you then benefits are tax free when received! Most group policies are inadequate, but they are better than nothing.
Who Needs Disability Insurance?
To put it simply, anyone who has earned income needs some form of disability insurance!
Consider this – it’s estimated there are approximately 6 million car accidents per year in the U.S., with 3 million of them resulting in serious injury and around 2 million of them permanent!
Think it can’t happen to you? Think again.
Most accidents don’t result in death. In fact, only about 42,000 of these 6 million accidents are fatal. I don’t mean to downplay the fatalities here, but the point is this - You are more likely to be involved in an accident and get seriously injured than you are getting into a fatal accident!
Put it another way – you are more likely to need disability insurance than you are accidental death insurance.
How Much Does Disability Insurance Cost?
Depending on the type of policy and the benefits, most individual disability insurance policies are relatively inexpensive.
If you have disability insurance through your employer, they might pay for most of it and you might be on the hook for a very small portion if you wanted to increase the benefit!
Let’s say you are covered by a group policy at work that will pay you 60% of your income should something happen and you want to get an individual disability policy to cover the remaining 40%.
Your premiums would generally run anywhere from 1% – 3% of your annual income to insurance 100% of your take-home pay.
Like I said, relatively inexpensive if you want to insure the goose! If Aesop sold insurance his moral of the story might be: It’s better to take a tiny portion of the golden egg to insure the golden-egg layer!
Have you purchased an individual disability insurance policy?
Do you have one through work?
{ 11 comments… read them below or add one }
Well you’d be wrong about the relatively inexpensive part here in Canada. My husband is in a semi-dangerous line of work. As such he’d have to pay almost $500 per month. That’s a quarter of what he takes home some months! Not in the slightest inexpensive, relatively or otherwise.
Jason:
Help me understand you when talk about insuring 100% of your income. Group disability policies usually max out at 60% and once in a while you can find a buy up to 70%. Individual disability insurance policies have various limits that vary slightly from company to company but they are almost around 70% or so. Then they have the catastrophic rider that will cover 100% coverage but that is literally the loss of a limb, eyesight, hearing, etc. Where you referring to this rider?
Hi Jason,
Thank you for the good article and I thank those who posted good comments. I did have a question: Why does everyone who has earned income need disability insurance? There are individuals who are: (1) debt free, (2) have enough passive income to live on but choose to work as well, or (3) see excessive insurance as dampening their sensitivity to God’s Will. Do you recommend disability insurance to them? If so why?
Thank you for your time and effort.
Cedric
This is all true, true, true. UNTIL the disability insurance company denies your claim. And they will. Or they will at least try.
Here is just one recent example covered by NPR, in the wake of the recent mine explosion in WV. http://www.npr.org/templates/story/story.php?storyId=126303910
Sadly, this man’s story is not uncommon. I have heard over and over and over again, from people with different types of disabilities, in different types of employment, who echo this exact experience. Disability insurers will find a reason not to pay benefits. Or delay long enough that you simply give up and go away.
What is heartbreaking and tragic is that those who truly need the benefit, (obviously) need it because they are very ill, or injured. The employee/patient has little physical stamina to go through a lengthy hassle with his/her insurer, on top of the health crisis s/he is already experiencing. Many patients are simply too ill to fight, and give up on their claims. Most patients cannot afford attorneys to fight the insurance company for claims. And if they can afford it, and if they do pursue it, and if they are awarded (their rightful benefit for which they paid premiums and should not have to fight for) they then have to spend what they just fought for on the attorney’s fees.
All those premiums, for all those years, for nothing. A loss of health, a loss of income, and enormous medical (and possibly legal) bills. It happens. All too often.
Many times this process takes so long, the patient has died before the claim is finally approved.
I recently heard (I thought it was on NPR) a staggering statistic about the % of disability claims that are actually awarded, but I cannot find it now! I wanted to post it here. It was insane, something like 10%.
Disability insurance IS absolutely necessary. But only if claims are paid in an honest and timely fashion. I would love to see a follow-up article to this one that covers the challenges of a health crisis and how insurers truly respond to claims. From both the patient and the insurer perspective.
Not the most reliable source, but there are absolute facts in this article worth looking into further:
http://ezinearticles.com/?Disturbing-Trend-in-Michigan—Disability-Claims-Approved-and-Then-Abruptly-Taken-Away-Within-a-Year&id=3952861
My ears perk right up when a financial professional suggests that some percentage of income should be spent on an insurance policy, in the way that this blog borders on doing. Frequently such advice can be directly contrary to the client’s best interest, as it would have been if applied to my own financial situation.
Cedric’s point about passive income being more than adequate must be considered. This really happens to people. Another real-life scenario when a married couple can make ends meet with either spouse working.
Let me clarify and respond to a couple things – Of course every situation is unique and different. Cedric, you bring up great points – if passive income is enough to cover your expenses then certainly you are not in need of insurance.
By the way, if conscience precludes you from buying insurance then DO NOT, I repeat DO NOT go against your conscience and your sensitivity to God’s will.
I don’t think this post suggests purchasing excessive insurance.
Barbara – you are right, you have to be very careful with the policies you purchase – there are definitions of disability that need to be looked at and make sure you are getting a policy that is worth paying for.
The bottom line is that ALL types of insurance (health, disability, life, auto/home) protect against the What Ifs in life. I’ve seen real life examples of people who were so glad they purchased disability insurance BEFORE the disability occured.
Should everyone buy it? No, again there are always exceptions. Should you look at your situation to see if you need it? Of course you should – it’s part of the financial planning process. Just make an informed decision based on your unique needs and goals.
This is just an industry promotion piece. If you don’t mind my asking, how do you make your living? And did you have any contract or benefit from publishing this article?
Now to personal experience… the disability insurance offered at my company proposes to make up the difference between the 50% the state will pay and the 60% it will pay. So, they sell a disability insurance that actually wouldn’t pay more than 10% of what I earn. I spoke to a financial manager and he said that it would be worthwhile once a person made more than $40/hour. But not for those making under that. Well, of course the disability insurance is most often subscribed to by people who will never see any benefit from buying it. Even if it did honestly pay for disabilities…which, from the news I’ve seen over the last twenty years, doesn’t seem likely.
Jackie, I am going to step in here to clarify some things. First, I created and am the editor of ChristianPF – Jason is one of the regular writers who happens to be a financial advisor. I am a little disappointed that you are so quick to assume the worst of a person, because in fact Jason doesn’t have any contract or benefit that he could personally receive from writing this article.
The truth is that Dave Ramsey (who doesn’t receive any financial benefit from the recommendation) and many other financial gurus recommend long-term disability insurance. Like Jason said, it is not for everyone, but I agree that it would be a very good idea for some people.
I had long-term disability and years later contracted meningitis and badly needed the coverage I had taken as part of my employment package and for which I paid for all the premiums. My insurance paid only for 1 1/2 years. Not worth the premiums I had been playing.
For those of you seeking help because you got denied, here’s a resource for long term disability laws: http://www.disabilitydenials.com/long-term-disability-laws.html