While individual disability income insurance is the most sensible way to protect your ability to earn an income, there are alternatives such as social security disability benefits, group disability insurance plans or personal savings. Each of these alternatives is discussed below.
Social Security Disability Benefits
Social Security disability insurance is very difficult to qualify for given the broad definition a disability. Additionally, the monthly benefit available, in most cases, is not nearly enough to maintain a reasonable standard of living.
The Social Security Administration defines a disability as the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. A person must not only be unable to do his previous work or work commensurate with the previous work in amount of earnings and utilization of capacities, but also be unable, considering age, education, and work experience, to engage in any other kind of substantial work which exists in the national economy. It is immaterial whether such work exists in the immediate area or whether a specific job vacancy exists, or whether the worker would be hired if he applied for work.
Given the fact that Social Security Administration’s definition of disability is so restrictive,
and the benefits payable are limited, there is no reason to rely on these benefits alone.
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Group Disability Insurance Plans
Group disability insurance may be available through your employer or a professional association. While group disability protection is usually very reasonably priced, there are several limitations to this coverage. First, the maximum available insurance is usually only 50% of earnings and may be offset by any social security benefits or other government benefits received. Additionally, at your employer’s discretion, the plan may be discontinued; benefit options may be reduced or cost of the plan increased. Finally, disability income group policies are not portable. If you leave your job, you will lose your disability protection.
The cost of group disability insurance is lower than individual DI, but the comprehensive benefits and portability of individual coverage make it the better value.
Personal Savings or Self-Insuring
Self-Insuring for a potential disability is fine if your family can maintain its pre-disability standard of living for as long as you are disabled without the risk of running out of funds. Consider
the following example. Let’s assume Joe makes an income of $100,000. In the event Joe is disabled, at least $60,000 of income is needed to maintain the family’s standard of living. If the disability lasts 4 years, $240,000 would be required. If the disability is 10 years, the income needed over the period would be equal to $600,000. At a net 5% rate of return, it would require $1.2 million to generate $60,000 annually without reducing the principal balance. These figures do not account for inflation, retirement savings, college costs or potential additional expenses required to adjust to the disability.
Only the wealthiest individuals should consider self insuring!
Individual Disability Insurance is the Smart Choice
The threat of disability is greater at most ages that the chance of death. However, most individuals have significant life insurance policies but very little if any disability income insurance coverage. Your ability to earn an income is likely your greatest asset. Why insure your life, house, car and boat but not insure your ability to pay for these luxuries?
