The other night, over dinner with friends, a conversation was sparked over something most of us never think about: disability insurance. Both couples at the table were receiving disability insurance benefits -- one short term and one long term. While it was relevant to us, most people don't start the conversation until after there's a problem.
What are your chances of actually needing disability insurance?
What would happen if you couldn’t go to work? What kind of personal and financial stress would that put on you and your family? How would you make ends meet?
The chances of this happening are surprisingly common. Over 37 million Americans are classified as disabled. That’s about 12% of the population. We think that we are immune to these types of problems, but we are not. Just over 1 in 4 of today's 20-year-olds will experience a period of disability before they retire, and if you are an average 35-year-old woman you have a 24% chance of becoming disabled for a period of three months or longer during your career. In addition, 90% of disabilities are caused by illness, not accidents.
The Council for Disability Awareness has some great information on disabilities. You can calculate your Personal Disability Quotient with their PDQ calculator. This will help you identify your risk factors such as excess body weight, tobacco use, chronic conditions such as diabetes and high blood pressure, as well as high risk activities and behaviors.
How would a disability impact your financial situation?
What would happen if a wage earner in your family couldn’t go to work? If they worked in the private sector and had 40 quarters of Social Security they may qualify for a Social Security Disability Insurance benefit -- but this is an extremely hard benefit to claim. If they do receive the benefit, the average monthly benefit in 2013 was $1,146.42 per month. Most families couldn't get by on that.
An alternative is to purchase private disability insurance either through your employer or individually. Disability insurance can cover a portion of your lost wages after an elimination period; however, the policy needs to be read carefully because there are numerous terms governing waiting periods, length of payments, amount of wages covered and whether the policies coordinate with other disability benefits.
In the insurance world risk is measured by both probability and severity. The disability event has a moderate probability but has an extremely high severity. The loss of income is initially severe and places a financial hardship on the family. The suffering is magnified as time progresses. What happens to our friends as months and years pass and they are not able to return to work? The rest of us will continue on our careers, get raises and promotions, and save for our retirement.
For the friends we were were chatting with over dinner, their current situation is permanent and change is unlikely to occur. If their disability payments are not indexed, and most are not, then every year the cost of living increases and their benefits stay static. Over time the income shortfall becomes worse and their lifestyles become more limited. Savings for retirement are virtually eliminated and they are stuck in a trap of long term misery. The severity of their financial situation will continue to deteriorate. If you are unfortunate enough to experience a disability event early in life, the cumulative effects are severe.
PERA benefits can help soften the blow
It’s a strange fact in the insurance world that when you see someone you know experience a loss that you immediately review your own situation. If you work for a PERA-covered employer and are a plan member, you will want to check-out the PERA benefits information and see what disability benefits you are entitled to.
If you have worked for a PERA employer for more than five years, you will be eligible for both short term and long term disability benefits. I was relieved to see that, if I had a similar disability situation, I had built in protection and my salary would continue to be paid at 60% of my current level for twenty two months. If I was totally and permanently disabled, I would be eligible for a PERA Disability Retirement. One of the benefits of the Disability Retirement is that I would receive the annual increase so my benefit would continue to go up over time, instead of being eroded by inflation.
Looking at the trials and troubles of those around me makes me thankful for being blessed with good health. Having my friends share their experiences with me makes me appreciate how fortunate I have been to get this far without such financial hardship. Taking the time to review my own PERA benefits gave me a new appreciation of the security that is provided for my family.
Have you thought about what would happen to your financial picture if you were temporarily or permanently disabled?