How Insurance Works

Insurance is essentially paying rent to access a pool of money based on the terms of the policy should certain events take place.  (e.g., auto insurance is for when/if you get into an accident, life insurance for when you die and countless other coverages).  The question many ask is “when should someone get insurance?”  The answers vary based on an individual’s circumstances, the type of insurance and if it is legally required depending on what you’re insuring.  If it isn’t legally required, then acquiring insurance generally falls into 1 of 4 buckets based on the likelihood and estimated amount of the insurance pay-out.

*This is not a recommendation to have or not have any specific type of coverage.

Obviously, insurance companies are not overly interested in covering highly likely and expensive events, but sometimes coverage can be obtained.  The real advantage insurance companies have is the law-of-large numbers.  While we don’t know when we will die, from an actuarial perspective, insurance companies can estimate how many people will die based on a populations demographics.  The larger the pool the more accurate the estimates, and thus they can spread the risk out over the population, and yes take a profit for pooling the risk.

The Case for Disability Insurance

Most people believe that a disability won’t happen to them, and to be honest that is true (see table below).  However, that doesn’t mean it can’t happen to you and the majority of private sector employees don’t have long-term disability protection.  It is estimated that “65% of the private sector workforce has no long-term disability insurance.”¹ Disability insurance protects your income, should you become disabled.  Typically, group coverage offers short-term disability that replaces close to all of an employee’s wages, with long-term disability (typically defined as 6 months or more) covering around 60% of income.  Benefits vary greatly from company to company.  Many people can’t lose 40% of their income and continue to pay their bills and save for retirement.  In effect, making disability protection not just income protection but retirement protection as well.  Unfortunately, “more than 1 in 5 adults believe that unemployment or Social Security will cover them if they become disabled.”²   However, “the average Social Security Disability Income benefit is $1,362”¹ and “85% of disabling accidents and illnesses are not work related, and therefore are not covered by workers compensation.”³

Likelihood and Average Duration of Disability by Age.⁴

Group vs Individual Disability

Most people believe that optional long-term group disability insurance is cheaper than private disability insurance.  While that can be the case, at times it is more cost effective to get disability insurance based on your own personal health and needs.  Long-term group disability insurance is not generally individually underwritten, rather it is underwritten based on a large population.  Meaning, those in better than average health can pay a higher premium than they would if they purchased their own insurance.  In the insurance industry this is called "adverse selection."

Factors in Disability Insurance Premiums

There are several factors that influence disability insurance premiums.  Some factors we can influence or change and some we can’t.  Obviously, your sex, job and age affect the rates the most.  The alternative to not getting older is not ideal and your job may not be something you want to change.  The more manual labor involved the higher the rate in general.  Men typically pay more for life insurance and less for disability insurance.  Height, weight, and medical history can also change how much disability insurance costs or create exclusions.

The Cost of Coverage!

The following table will illustrate monthly costs of coverage based on sex and benefit periods.

For a 40 yr. old, non-tobacco, salary $95,000 with 60% long-term coverage from work, $24,000-$26,000 Benefit (Varies Carrier to Carrier), 3% cost of living adjustment and 180 day waiting period. (Various policy features by carrier)

Contact Keith Tucker CFP^® at (571) 441-1939 to find out how you can protect your income!

1-Social Security Fact Sheet 2022, 2- Disability Literacy: How Consumers Rate Today, April 2005, The Hartford       3-National Safety Council®, Injury Facts® 2008 Ed., 4-1985 Commissioners’ Disability Individual Table A