Dear Liz: My husband and I have individual life and disability policies. We have two teenage children and have had some health issues in the past. I think the life insurance is important, but I’m not sure about the disability insurance.
My husband and I have coverage at work, although it would not make us whole if we got disabled. Together we make more than $350,000 a year. We have two homes and pay private tuition, so there are a lot of bills to pay. But is the insurance worth the money we spend every month?
Answer: You may have read some scary statistics about the likelihood you’ll face a disabling injury or illness. One often-quoted statistic has you facing an 80% chance of serious disability, one that would prevent you from working for 90 days or more, before age 65.
But it’s not clear how accurate those statistics are. Last year, columnist Ron Lieber of the New York Times tried to find the facts behind insurance industry proclamations about disability and found little agreement. One source pinned the risk of serious disability at closer to 30%. If you have a white-collar job, you may well face less risk than someone who does physically dangerous work.
The reason you buy insurance isn’t to cover likely events, in any case. It’s to cover events that could have a catastrophic financial impact if you didn’t have the policy. That certainly describes most people’s risk when it comes to disability. The Social Security system provides limited payments to only the most disabled workers, and workplace policies are often limited and may not cover disabilities that aren’t work-related. An individual disability policy can be a good idea because it provides more coverage.
You can’t expect any disability policy to make you “whole,” however. Many insurers won’t replace more than about 60% of current income because they don’t want to give you an incentive to fake a disability.
Consider asking an independent source, such as a fee-only financial planner, to review your workplace disability coverage to see whether you need to hang on to your individual policies. If the cost of the coverage is an issue, this planner can help you research your options, such as choosing a longer waiting period before coverage kicks in or limiting your benefit period to three or five years instead of through age 65. An experienced independent insurance agent can help you compare policies, as well.