Understanding disability insurance: Don't wait until it's too late

By Posted : 05/07/2012

disability insuranceIf you have only a vague understanding of disability insurance coverage, you're not alone.

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It can be confusing to learn about the roles disability insurance, accidental death and dismemberment insurance, workers' compensation, and life insurance play in providing a safety net for your family. But failing to become informed may mean you have insufficient coverage should you die unexpectedly, get injured or maimed, or become disabled.

Not having the right coverage can lead to a financial crisis just when your family needs help the most. Now, a consumer group is advocating for awareness about disability coverage.

Only 13 percent of workers know "a lot" about disability insurance, according to a recent national survey by the Consumer Federation of America (CFA) and Unum, a provider of employee benefits in the U.S. and Great Britain.

Disability insurance provides a good portion of a worker's income if he or she leaves the job because of injury or illness.

Both the CFA and Unum say the ignorance is disturbing. They stress that more employees need to be aware of the protection -- and have access to it.

"For the vast majority of workers in America, a group disability policy gives them a (financial) foundation if they can't work," says MC (Mary Clarke) Guenther, a spokesperson for Unum. She notes that up to 30 percent of employees don't have either long-term or short-term disability coverage.

"We think that number is too high," she says. "Employees and employers should work together to make sure this insurance is part of their workplace. People have to know what they have and what's available."

The CFA/Unum findings include:

  • Seventy-seven percent of all employees say they would suffer "great or moderate financial hardship" if they did not work for three months because of injury or illness, and 50 percent say it would be a great hardship. Almost 80 percent say they would experience great financial hardship if they did not work for 12 months.
  • About 76 percent of employees say it is a good idea for employers to automatically enroll workers in a disability insurance program that these employees could decline only at the outset and each year after.
  • When employees were told that small employers are least likely to offer disability insurance, 71 percent said they agreed with the statement that the federal government should provide these employers with "a one-time tax incentive to help them create a group disability insurance option."


The poor are less likely to report being offered disability insurance

Fewer than half (46 percent) of workers with household incomes under $25,000 say their employer offers disability coverage, according to the report. But 80 percent of those with household incomes of $100,000 or more say their employers do offer it.

"Seventy-two percent of the lower-income group, but only 51 percent of the upper-income group, say that it is very important to them personally to have this insurance coverage," according to the CFA. "And lower-income workers are nearly as willing as higher- income workers to pay for this coverage."

How much does disability cost and what does it cover?

The CFA/Unum survey, which polled 1,200 workers, also notes that:

  • Once informed of group disability insurance, 90 percent say they'd be willing to pay for it.
  • Of those who have coverage and are aware it only 41 percent knew how much it costs. Only 47 percent knew the benefits.
  • Eighty-seven percent say they'd be willing to pay half of a $30 monthly premium to get the coverage. And 56 percent were willing to pay the full premium.

"Almost all workers wisely want disability insurance protection and are willing to help pay for it. But since only about one-third have long-term disability insurance, there is a huge gap between worker desire for coverage and the extent of actual coverage," Stephen Brobeck, CFA's executive director, said in a statement.

Depending on the specific plan, an employee starts getting checks equal to about 60 percent of his or her income within one week to six months after leaving the job due to disability, according to the CFA. Long-term coverage usually has monthly premiums -- paid for by the employer or employee, or shared by both -- in the $10 to $30 range, according to the CFA.

Workers' compensation and Social Security Disability Insurance (SSDI) do provide some income protection, but the CFA says it's not enough. Workers' compensation is available only to those who are hurt or become ill while working, but most injuries and illnesses causing work loss occur away from the job, according to the CFA. The report adds that SSDI benefits average only $13,000 a year.

Does group disability and AD&D insurance provide sufficient coverage?

Guenther says that group coverage usually protects 50 percent to 70 percent of a worker's income, with the 60 percent quoted by Brobeck being "pretty standard."

Still, it's important to remember that group disability payouts are taxable if your employer pays the entire premium, so that 60 percent salary benefit can be much less in some cases. (See: "5 group disability insurance myths").

To guarantee they get more of their salary when receiving disability benefits, Guenther says some employees decide to buy an individual policy through a private insurer as a supplement to their group disability insurance.

But it's not cheap. "One thing that's good about group insurance is the affordability, usually at around $10 to $30 a month," Guenther says. "An individual policy, however, can cost $1,000 to $3,000 a year."

In addition to group disability coverage, many people are also unaware of the benefits and drawbacks of accidental death and dismemberment insurance (AD&D), which is also typically offered through employer plans.

AD&D insurance is one option for workers worried about providing for their families should they die or be maimed in an accident. But insurers typically recommend you also have disability insurance and a life insurance policy. (For more information, see "Will AD&D insurance help protect your family?")



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