Disability insurance can save your life

By Ginger Applegarth

Ask any financial planner or insurance agent what risk could be called "the forgotten risk," and, chances are, the answer will be disability. Their clients often come in the door questioning whether they have too little, too much or the right kind of life insurance, but rarely have they thought about how they could survive financially with no earned income.

In reality, disability insurance is as important as (and in some cases, even more important than) life insurance.

Facing the numbers

At any given age, the odds of becoming disabled are much higher than the odds of dying. Every year, 12% of the adult U.S. population suffers a long-term disability. One out of every seven workers will suffer a five-year or longer period of disability before age 65, and if you're 35 now, your chances of experiencing a three-month or longer disability before you reach age 65 are 50%, according to the National Association of Insurance Commissioners (NAIC). If you're 45, the figure is 44%.

These odds would not be a problem if people had substantial savings that could be drawn on in the event of a disability. But that's rarely the case, and any money that has been set aside has likely been earmarked for goals such as college or retirement. In a 2007 NAIC survey, 56% of adults said they would be unable to meet their expenses if they couldn't work for a year.

'A living death'

Disability is called a living death for good reason.

First, suffering a disability would be a catastrophic event for you, your family, your friends and your co-workers. It would create enormous emotional pressures for the family because your role would change and you would have physical needs to be met. There would be enormous financial pressures that would exacerbate those emotional pressures. You would witness firsthand the impact that your disability planning -- good or bad -- would have on you and your family.

Harder to get

To complicate matters, fewer employers offer disability insurance than life insurance, and it's much harder to qualify for individual disability coverage than for individual life insurance. The bottom line is that if you're working and you need your income to live, you need disability insurance.

When you apply for disability insurance, the insurance company will tell you if you have too much money to qualify for coverage. That's because, unlike life insurance, you can't buy all the disability insurance you may need. Usually, you can get a maximum of 60% of your monthly earned income before taxes. (Unearned or investment income does not qualify, because it presumably continues even if you are disabled.) The limit is in place so as not to deter people from returning to work.

Social Security disability coverage

If you are working, you may already have some disability insurance, even if you haven't thought of it that way. It's called Social Security. Social Security provides disability income as well as retirement income. However, it's very difficult to qualify for the benefits. More than 80% of the applicants fail the first time around. Some hire lawyers to help in the appeals process.

You can get an estimate of your Social Security disability benefits online. Just as with retirement benefits, your disability income is dependent upon your "covered earnings," or the amount on which you are taxed for Social Security. Because they're so hard to come by, don't count on the benefits when you evaluate your disability income needs.

Workers' compensation

The second kind of disability insurance you may already have is workers' compensation. Many employers are required to provide this coverage, although the amount and duration of monthly benefits varies by state. This kicks in if your disability is job-related. Payments typically last for a few years and tend to be low.

Just as with Social Security disability payments, it's wise to think of workers' compensation as a nice "extra" if you qualify, but don't count on it.

Continued: Start with your employer

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