The Aflac duck quacks about it all the time -- disability insurance. But do you really know much about it? Probably not. And your relatives, friends and co-workers probably don't either.
A study by the nonprofit Consumer Federation of America and disability insurer Unum asked 3,000 Americans about their knowledge of group disability insurance. As the two organizations predicted, most people held many misconceptions about this type of insurance, with a foggy notion of how the benefits work.
“For consumers, disability insurance represents an important means of income protection but is given relatively little attention by employer, worker and consumer groups, and even by the press,” says Stephen Brobeck, executive director of the Consumer Federation of America. “We thought a survey might focus more attention on this issue, and it already has, in part because we found that when employees know something about group coverage, almost all of them want it.”
Here are four things you need to know about disability insurance to get your financial ducks in a row.
1. You’re more likely to make a disability claim for a disability related to an illness, rather than an injury.
Two-thirds of people surveyed thought they were likely to make a disability claim only if they suffered an injury that required significant time off from work. However, according to the Council for Disability Awareness, common illnesses and chronic conditions account for 90 percent of all disability claims paid. Those include ailments like carpal tunnel syndrome, multiple sclerosis and cancer.
2. If you become disabled, there’s a 50 percent chance that you’ll be out of work for more than two years.
People who were surveyed were overly optimistic about how soon recipients of disability insurance benefits could bounce back. They incorrectly thought that three-fourths of people who've been out of work for three months because of a disability would be able to return to work within two years. In reality, only half of them are able to return within that period.
In the absence of a disability insurance policy, this can cause huge financial and emotional strain on a family, says Marc Cesarano, an employee benefits consultant at the Savitz Organization in Philadelphia.
“Being disabled for six months or more can have a domino effect on a person's financial situation. This is a time when most people's medical costs are increasing, and they could possibly lose their job," Cesarano says. "However, those who do not have money put aside may be in a situation where their income is decreasing at the time they need it most.”
3. You may not have the workplace coverage that you think you do.
In the study, there was a big disconnect between how many people thought they had disability coverage through their employers (65 percent) and how many actually do (32 percent). Of those who thought they had coverage, many didn't know how much coverage they'd receive when making a claim, or how much the employee or employer paid each month in premiums.
If you have coverage (or think you have it) through your employer, talk with someone in your human resources department about when you’d receive coverage if you need it, and how it compares with your current salary. It may not be enough. Employer-backed disability insurance is shown as a percentage -- often 66 percent -- of your base salary.
"Total cash compensation that consumers actually live on may be based on salary plus bonus (or commission),” says Laurence Stybel, co-founder and former president of career management firm Stybel Peabody Lincolnshire Inc. “The result is that many employees are underinsured and do not know it.”
Additionally, many group policies -- coverage bought by employers -- limit the amount of time that a group policy will continue paying out. Some employers offer only short-term policies, which may provide anywhere from several weeks to one year of coverage; some long-term policies may provide two years of coverage.
If you’re underinsured, investigate your options for paying additional premiums to get more coverage. If your company offers no insurance at all, consider buying an individual disability insurance policy.
4. Disability coverage is more affordable than you may think.
In the survey, the Consumer Federation of America and Unum found the average monthly cost of employer-sponsored, long-term disability insurance plans ranged from $10 to $30 — an affordable amount that more than half of people questioned in the survey said they'd be willing to pay for on their own, even if their employers didn’t chip in.
If you need to buy individual long-term disability insurance (either because your employer doesn’t offer it or you’re self-employed), your options are generally more expensive, but may be more comprehensive. According to the LIMRA trade group, the average annual cost for an individual disability premium is $1,684 for a $4,242 monthly benefit. If you're self-employed, the cost of your premiums is tax-deductible.
The bottom line
If your family relies on your income to pay bills, disability insurance is an essential tool for helping your household stay afloat in the event of a long-lasting illness or injury, experts say. The chances of needing disability insurance are significant. According to the Social Security Administration, 30 percent of all working Americans will suffer a disability sometime during their careers.
“Your most important asset is your ability to earn,” says Susan Combs, president of Combs & Co. Insurance in New York. “You insure your car, your apartment, your business and your life, so why wouldn't you insure your income?”