September, 2012
Most Americans Unprepared for Disability
For millions of Americans, purchasing adequate disability income insurance is a potentially effective way of protecting against the financial hardship that could arise if illness or injury were to result in a long-term absence from work. Yet a new study found that the majority of Americans lack basic knowledge about the likelihood of a disability and are unprepared to handle such a life-changing event. (1)
The Social Security Administration estimates that one in four of today’s 20-year-olds will become disabled at some point during their working years. The study found that women across all age groups report a higher incidence of disability than their male counterparts, with arthritis and back/spine problems being the leading causes.
The financial impact of disability can be severe. A person with an annual income of $50,000 who works for 40 years is projected to make more than $2 million in future earnings. The loss of these earnings can be devastating for an individual or a family—and for women, the financial consequences can be more severe. The study found that women are twice as likely as men (22% vs. 12%) to think their cash reserves would last less than a month. Single women have an even bleaker outlook.
According to the study, 61% of women and 46% of men have never researched disability insurance—and fewer than 10% have purchased disability insurance plans. Even among individuals who work with a financial advisor, awareness and planning around the topic of disability is low. Fewer than half have consulted with advisors about what would happen if they or their spouse became disabled, and fewer women (37%) than men (52%) have had this discussion with an advisor.
Types of Insurance
For most people, there are two main forms of disability income insurance to consider: employer-sponsored policies and private insurance policies. Employer-sponsored policies (called “group” policies) are relatively inexpensive to purchase and generally remain in effect for as long as the individual continues to work for the company.
Private insurance policies are paid for by individuals and provide coverage when group policies don’t apply or don’t provide enough income. On the surface, a private policy is usually more expensive to purchase than a group policy. However, a private policy’s potential to provide much greater benefits over time may make it a more prudent long-term choice.
For all practical purposes, if you need the income you earn at work, you probably also need disability income insurance. Among those who are most likely to need disability income insurance coverage are small-business owners, the self-employed, high-income professionals, and the primary breadwinners in a household. Your insurance professional can help you find out if you have enough coverage.
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(1) Source: State Farm Center for Women and Financial Services, “Women and the Risk of Disability,” May 2012.
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© 2012 S&P Capital IQ Financial Communications. All rights reserved.
September 2012 This column is produced by the Financial Planning Association, the membership organization for the financial planning community. It has been modified and is provided by Thomas A. Fisher, a local member of the FPA.
The material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your own adviser prior to implementation in order to determine whether the strategies mentioned are appropriate for your specific situation.