Disability coverage often is the first thing to go

Posted on May 6, 2010.

Author: Tim Grant Pittsburgh Post-Gazette

Most people are inclined to buy insurance for things they value the most, such as their homes and cars. But they often do not consider insurance to protect their greatest asset – the ability to work and earn an income.

More than 100 million workers in the United States are without private disability insurance, and 70 percent of workers in the private sector have no long-term disability insurance through their jobs that would keep providing a regular paycheck if they became either permanently or temporarily unable to work, according to the Council For Disability Awareness.

"Without disability insurance, most people would face devastating financial consequences if they were to suffer a disabling injury or illness," said Marvin Feldman, president and CEO of Life Foundation, an insurance education organization based in Arlington, Va.

A new survey by the Life Foundation shows 84 percent of Americans strongly agree they should insure their cars, and 80 percent feel it's critical to have homeowner's insurance. Yet only 48 percent believe that it's imperative to have disability insurance if they have a job.

According to the U.S. Census Bureau, nearly one in five Americans will become disabled for a year or more before the age of 65. When so many families are living from one paycheck to another, even a short time out of work could be devastating.

"Disability is one of the topics every financial planner should discuss with clients because the likelihood of being disabled is greater than the likelihood of dying young," said Etti Baranoff, an assistant professor of insurance and finance at Virginia Commonwealth University.

Disability insurance is often bought or provided by employers, but those policies are subject to rules governed by the federal Employee Retirement Income Security Act (ERISA). Because it falls under federal jurisdiction, states may be unable to help workers whose disability claims are denied. That is why many advisers recommend clients buy their own disability policies through private insurers.

"Sufficient disability coverage often takes a back seat to life insurance for several reasons," said Jonathan Bergman, vice president of Palisades Hudson Financial Group in Scarsdale, N.Y. "The simplest reason is that consumers acknowledge that death is inevitable while long-term disability is not.

"Furthermore, disability insurance premiums are substantially higher than life insurance premiums for the same level of potential coverage," he said.

The cost of a long-term disability insurance policy varies based on income, age and occupation.

"People often feel invincible and tend to drastically underestimate the possibility of experiencing a disabling accident or illness," said Lynn Dumais, vice president, individual disability income for MetLife.

Even consumers who are convinced of the importance of disability insurance must beware of pitfalls in the industry.

"While some long-term disability policies are iron-clad and pay benefits when you need them, others have more holes than a pasta strainer," said Frank Darras, a partner at DarrasLaw, a firm in Ontario, Calif., specializing in insurance litigation.

The most comprehensive disability insurance is known as "own occupation coverage." This type of policy entitles the owner to benefits if the illness or injury prevents the person from continuing his or her current occupation.

For example, if a surgeon lost an arm in an accident, he or she could not perform surgery, but could still teach at a medical school. Own occupation disability coverage would pay in this case.

The other two main types of disability insurance are "any occupation" and "modified any occupation" coverage. Policies that use an "any occupation" definition do not provide benefits unless the insured is "unable to perform the duties pertaining to any gainful occupation." Under this definition, a former tennis instructor confined to a wheelchair would get no benefits because he or she could work as a telemarketer.

Modified occupation plans are a bit more generous. These plans consider a person to be disabled if he or she cannot work in any capacity for which he or she is reasonably suited on the basis of education, training, experience and, sometimes, prior economic status.

Under any plan, it is rare that a disability insurance policy will cover 100 percent of a person's lost salary for fear that would encourage fraud and discourage workers from going back to work when they are better. Typical policies cover 70 to 75 percent of an individual's income.

MetLife released a study last week that found three in five individuals who were out of work for at least six months because of a disability did not have disability income protection. The study also found among those who did have coverage, only about one-third of their income was insured and it was not enough to meet their needs.

Dr. Baranoff said many people make the mistake of not opting for personal disability insurance because they assume the Social Security system will take care of everything if they become disabled.

What they often do not understand is that qualifying for Social Security benefits can be a long uphill battle. To qualify, a person must prove he or she cannot perform any job.

Illnesses such as cancer, heart attack or diabetes cause the majority of long-term disabilities, according to the Council On Disability Awareness. Back pain, back injuries and arthritis also are significant causes.

Once a consumer is sold on the importance of long-term disability insurance, there often is one more hurdle he or she faces before being able to buy it.

"It's actually harder to get disability insurance anymore," said Jack Taylor, a business professor at Birmingham-Southern College in Birmingham, Ala.

"In the last 10 or 15 years, a lot of companies have ceased to offer it and those who do offer it are more restrictive on who qualifies and the benefits they qualify for."

Tim Grant: 412-263-1591. "Money Q&A" and "Company Town" are featured exclusively at PG+, a members-only web site of the Pittsburgh Post-Gazette. Our introduction to PG+ gives you all the details. First published on May 6, 2010 at 12:00 am