[forgive the high grade corn in the title]
In our insurance rantings to this point, we’ve talked quite a bit about your early demise, and protecting your family from it’s painful hazards. It’s been… a dark time. Thinking about scenarios in which insurance becomes necessary is NOT “fun for the whole family”. Now, do we really think you’re going to die young?
A thousand times no! We don’t. On the contrary:
Honor your father and your mother, so that you may live long in the land the LORD your God is giving you. -Exodus 20:12
Even to your old age and gray hairs I am he, I am he who will sustain you. -Isaiah 46:4
With long life I will satisfy him and show him my salvation. -Psalm 91:16
We speak these things over you and believe this is God’s plan for you… HOWEVER! Early death could happen! And if it does, we don’t want it to wreck your outpost (even if you are no longer with us in living color). Unexpected and premature death, you see, is highly unlikely but catastrophic when it does happen (making it a perfect risk to deal with via INSURANCE). What you may not know is that there are other risks that can be addressed with insurance that are far more likely than kicking it at age 40.
One of those considerably-more-probable risks is… disability.
[For the sake of this article, we are going to talk LONG TERM disability, meaning disability that lasts between 90 days and forever.]
A whopping 25% of young working Americans will experience a period of disability that lasts for at least one year before they reach normal retirement age. Yikes. That’s a whole lot more Americans than end up cashing in on that term life insurance policy. Did you know that if you are one of that quarter that becomes disabled, you’re actually more of a financial risk to your family than if you die? THIS IS A SUCKY TRUTH BUT A TRUTH NONETHELESS!
It makes perfect sense. Just think about it: it’d be far easier for your beautiful (happy, skilled, blossoming) wife to go find a replacement for you for the family team, than it would be for her to support you in any kind of a vegetative state, while she also raises your children and brings home the bacon that you’re no longer providing. (Just imagine the hardship of that scenario. God spare us and our spouses from that possibility!)
So while you may not have ever considered the need for disability insurance (and–spoiler alert–it’s not for everyone), it’s actually much more likely, statistically, that you’ll have need of it than that term policy that you so wisely purchased on the advice of your favorite Biblically-based money blog. *ahem*
The determination of whether you’re dead or not dead is pretty cut-and-dried. (Personally, I go with the Is-there-blood-flowing? method of determination.) Defining disability, on the other hand, is almost as difficult as shopping for a policy that won’t leave you hosed when you lose a few fingers in a freak lathing accident. (You can’t believe how OFTEN TERROR strikes the lathe!)
So, let’s just come up with a definition. Because a disability insurance policy will pay you based on whether or not it deems you to be “disabled”, it’s reeeeally important that you understand how that gets determined. (Unfortunately, it’s neither intuitive nor uniform across insurers.) For our purposes, there are three big categories of disability:
- SOCIAL SECURITY: If you’ve worked long enough and recently enough (this is most of you) to qualify for Social Security disability benefits, then good news: you’ve already got SOME level of disability coverage. Here’s what our slowly-fraying government safety net says needs to happen in order for them to send you monthly checks: “To meet our definition of disability, you must not be able to engage in ANY substantial gainful activity (SGA) because of a medically-determinable physical or mental impairment(s): That is expected to result in death, or that has lasted or is expected to last for a continuous period of at least 12 months.” This is the strictest definition of disability on our list. We pray that these checks will never see the inside of your mailbox.
- ANY OCCUPATION: If you buy an “any-occupation” policy, you’ll be deemed disabled if you become unable to work in any occupation for which you are reasonably suited, considering your education, training, and experience. In other words, if you can work in any gainful occupation, you’ll be denied benefits. So while the loss of your thumbs in that gruesome lathe accident means that you can no longer work as an ice-cream scooper (#troubles), you bet yer britches you can still do the dishes, you thumbless whiner… so you won’t be receiving any benefits here, either. [NOTE: don’t look up lathe accident videos just out of random curiosity. Unless you’re on a diet and want something to curb your appetite STAT. I did, and have lived to regret it.]
- OWN OCCUPATION: This type of policy defines you as disabled (and thus eligible for benefits) if you become unable to perform the majority of the occupational duties that you have been trained to perform. So if you were trained to neuter cats and you develop a tremor that would make it inhumane for you to continue in your trade, then you’re going to receive the full amount of your benefit – EVEN IF YOU GO GET SOME OTHER JOB. Hooray to this. (Unfortunately, because you could meet this definition, in some cases, while still being relatively able-bodied and of sound mind, this type of disability insurance is going to cost you the most.) [NOTE: don’t look up cat neutering accident videos either. I did NOT do this one… I just don’t want you to, either.]
Be advised: a policy can have a combination of the above definitions. For example, it’s common for a group policy to say “we’ll pay you if you can’t do your actual job (own occupation) for the first 3 years, but after that we’re only going to keep paying if you can’t do ANY job (any occupation).”
A few other thoughts to help you understand these policies:
- They have an “elimination period” – which is how long you’ll have to wait between meeting the definition of disability and starting to receive monthly income. Kinda like your car insurance deductible – a longer elimination period means (usually) a cheaper premium for you.
- There are a whole slew of riders (in insurance-land, a rider is just an enhancement that you can pay extra for and not, sadly, a friendly Comanche who delivers your monthly benefit amount) that we won’t dig into here. For example, you can buy a policy that will pay you a partial benefit or even base your benefit on how much of your income goes away due to disability. Etc. etc.
- As you may be realizing, this isn’t a particularly buyer-friendly market and I DO recommend finding professional help from someone who isn’t being paid a commission for selling you a policy. Selah.
Now you know the basic ways that disability insurers define disability, and you’re convinced that it would be wise to have some protection against disability (I hope you are, anyway. One out of four!? Tragedy strikes the modern age quite a lot.) So where are you supposed to get this stuff? Here’s my thoughts:
- SOCIAL SECURITY As we said, most of you already have this. Just keep in mind that the average person receiving Social Security disability benefits got $1,237 per month in 2019. Not exactly the retirement you’ve been dreaming of, right? Right.
- GROUP DISABILITY Many folks receive some level of disability coverage through their employer. While we poo-poo’d group term life insurance (who can forget that rousing post? Not me!), we don’t feel similarly about group disability plans. First off, the premiums tend to be either covered by your employer in full or in part. Even if you have to pay for the whole premium, these policies are usually more affordable than an individual policy. Secondly, some people don’t earn enough money to reasonably afford a decent individual disability policy, so group coverage can provide a great, useful option. (Remember bros… one out of FOUR people need this at some point!)
- INDIVIDUAL POLICY This is where you head over to one of the user-friendly insurance shopping sources (we like PolicyGenius) or contact a trusted insurance agent. As you can tell, these policies have so many nooks and crannies that you should do the research to make 1000% sure you understand exactly what you’re buying. One company’s slightly tweaked definition of “own-occupation” can be the difference in your receiving benefits or not. When in doubt, contact an expert who is not earning a commission to provide some neutral input. [NOTE: One thousand percent is mathematically impossible. I know that.]
As I was writing this GOLD out for you Abrahams out there (I’m imagining you all doing squats at the gym, while listening to our podcast, right before running out to your weekly meeting with your wife. MAN I esteem you guys), I dialed up a few estimates for myself on what it would cost to purchase an individual, own-occupation policy for about $5k per month of disability coverage from a quality insurance company. The quotes came back between $130 and $180 per month. While that’s not impossible for most families to fit into their budget, it’s also a lot more than most families are budgeting for their life insurance.
You’re like: “Mr. Wallet, thank you for explaining the finer points of these different kinds of policies and, while we’re at it, I sure appreciate your telling me how to acquire these… but this crap is franking expensive, yo! Can you give me a little hint as to how exactly I should prioritize disability insurance in my budget? Is it a nice-to-have or an essential? I’m not made of money, you podcasting nerd.”
I’m like: “Ok, calm down there, Taz. I’m trying to help. This is education, here.”
Let’s wrap up like this: I’m going to give you a few simple action items, mmkay? While they won’t definitively tell you what is right for your family when it comes to disability insurance, they should help you start to answer your own questions. And maybe do so without the raising of voices…
- Hop over to My Social Security and create an account. Once you’ve set everything up, you should be able to easily view what your estimated benefits would be (this is also great as you think about retirement planning). If you see that your monthly benefit is plenty to keep your family chugging along, then A) we’d like to enlist you as a LoDoFeb mascot, you thrifty sonofagun, but also (assuming you’re cool with the strictest definition of disability above) B) you’re probably ok with that alone. Skip investigating disability insurance altogether. Most folks should proceed to step 2.
- If you work for a company that provides benefits, scroll through your documentation and figure out:
- If you have any disability insurance or have the option to purchase it,
- What the definitions and specifics of that plan are, and
- How much it would cost. Think of it like a wicked cool Easter egg hunt… but instead of Cadbury treats you’re looking for “own-occupation riders” and “income replacement clauses”!
- Okay maybe the “nerd” label fits. A little.
- Group plan info in hand, go compare that to what you find on the web (or with the illustrations provided you by your trustworthy insurance agent or broker who isn’t trying to make a commission out of selling you policies).
After you’ve made your way through these three dynamite steps, you can begin to make an informed decision about how much of your monthly budget you want to use to insure future streams of income in the event of your own disability.
As you read the titillating details of disability insurance policies, you may see things that reference reduced benefits for social security payments (or not). I’ve left a LOT of details out of this article, so please don’t hesitate to reach out directly with questions as you dig into your own situation. My hope for you is that I’ve put a topic on your radar, and that whatever decision you end up making, you’ll do so armed with eyes wide open to the risks and potential mitigation strategies…
So go forth gents – may you shore up your corners of the Kingdom in strength, trusting in the LORD and using the tools He has put at your disposal. And, with your steady thumbs attached right onto the sides of your hands, may you never have to stop neutering those cats. Amen!
And if you’re ready for the final installment in our little insurance round-up, head over to this piece on the oft-overlooked Umbrella insurance.
*Mark Parrett is one of the founders of Abraham’s Wallet. When not blogging for you here, he’s raising a family in Salt Lake City, UT and working as a financial planner at Outpost Advisors.
