Everything You Wanted to Know about Disability Insurance (But Were Afraid to Ask)

May is Disability Awareness Month. While most people know about life insurance, fewer people consider the importance of disability insurance. Here are some noteworthy facts about disability from credible, third-party sources, compliments of Bob Gertie of Advisor Insurance Resource.

Causes of Disability

Many people think of disability as something that only happens to a manual laborer or blue collar worker. But a disability can happen to anyone. Consider these facts:

  • While many people think that disabilities are typically caused by freak accidents, the majority of long-term absences from work are actually due to illnesses, such as cancer and heart disease. (Life and Health Insurance Foundation for Education, November 2005)
  • Stroke is a leading cause of serious long-term disability. (Centers for Disease Control and Prevention, 2007)
  • Common causes of individual disability insurance claims are:
  • Over 85% of disabling accidents and illnesses are not work related, and are therefore not covered by worker’s compensation. (National Safety Council®, Injury Facts® 2008 Ed.) 

Need for Protection

A disability can happen to anyone, at any time.

  • At age 40, the average worker faces only a 14% chance of dying before age 65 but a 21% chance of being disabled for 90 days or more. (Insurance Information Institute, www.iii.org, November 2005)
  • In 2007, 12.8% of people ages 21–64 surveyed had a disabling illness. (U.S. Census Bureau, American Community Survey, 2007)
  • In the U.S., a disabling injury occurs every second, and a fatal injury occurs every 4 minutes. (National Safety Council®, Injury Facts® 2008 Ed.)
  • In the home, a fatal injury occurs every 12 minutes and a disabling injury every three seconds. (National Safety Council®, Injury Facts® 2008 Ed.)
  • There is a death caused by a motor vehicle crash every 12 minutes and there is a disabling injury every 13 seconds. (National Safety Council®, Injury Facts® 2008 Ed.)
  • Almost 3 in 10 workers entering the workforce today will become disabled before retirement. (Social Security Administration, Fact Sheet, January 31, 2007)
  •  In 2007, the employment rate of working-age people with disabilities in the U.S. was 36.9%. (U.S. Census Bureau, American Community Survey, 2007)
  •  Forty-three percent of all 40-year-olds will have a long-term disability event prior to age 65. (JHA Disability Fact Book, 2006)

Disability Duration

The average disability lasts longer than you think.

  • The average duration of a long-term disability is 30 months. (JHA Disability Fact Book, 2006)
  • Nearly 1 in 5 Americans will become disabled for one year or more before the age of 65. (Life and Health Insurance Foundation for Education, November 2005)
  • Three out of 10 workers between the ages of 25 and 65 will experience an accident or illness that keeps them out of work for three months or longer. (Social Security Administration, Fact Sheet, January 31, 2007)

Social Security Misconceptions

People have many misconceptions about the Social Security benefits they may receive if they become disabled. For example:

  •  More than 1 in 5 adults believe that unemployment or Social Security will cover them if they become disabled. (Disability Literacy: How Consumers Rate Today, April 2005, The Hartford)
  • Less than half―39%―of the 2.1 million workers who applied for Social Security Disability Insurance (SSDI) benefits in 2005 were approved. (Social Security Administration, Office of Disability and Income Security Programs)
  • The average monthly SSDI benefit is $1,004. (Social Security Administration, Fact Sheet 2008)
  •  In 2007, the percentage of working-age people with disabilities receiving SSDI payments in the U.S. was 17.1%. (U.S. Census Bureau, American Community Survey, 2007)

The Bottom Line

Disability is a major risk both in terms of probability and financial impact. Social Security is not a viable solution in many cases. Employer plans have limits―and you won’t work for your employer forever. Individual disability insurance coverage is often needed to supplement employer coverage, plus it is portable when you change jobs. Simply compare the cost of disability to life insurance and you can see the probability risk and financial risk of disability. Disability insurance is expensive but important!

About Bruce J. Berno, CFP®

Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.