Mellody Hobson is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS news.
Mellody: We have an important topic this morning, tom: disability insurance. Did you know that over the period of their working life, Americans have a 1 in 4 chance of being disabled for a period of time? In other words, 25% of Americans will have an accident or event occur that will prevent them from working. That is a huge number, and one that can put them on the path to financial ruin if they are not prepared! So today, i want to spend a little bit of time talking about how our listeners can make sure they are protected in the event that something unfortunate happens.
Tom: One in four is a big number! What do we need to know?
Mellody: First, let’s go over what exactly disability insurance is. With all the different kinds of coverage out there, it can be confusing and people can tempted to tune out of the discussion. But don’t! Disability insurance guarantees income in the event you are unable to work. And as i mentioned, you have a 25% chance of that happening. Think about that! What would you do if you couldn’t work?
Tom: Ok. How much do we need?
Mellody: When you are considering your coverage needs, calculate how much income you and your loved ones would require if something were to happen to you. A typical policy pays a benefit of 60% of your salary, up to a $5,000 maximum monthly payout, but you should check to make sure that is the case for you. If your financial requirements are larger that this – and they can easily be larger if you have a family – you will want to make sure you cover all of your costs. You also need to check how long the policy will last.
How do you get covered? Many employers will offer disability coverage. If this is the case, use your employer’s coverage. Historically, companies paid the full cost, at least up to a certain level. However, in recent years we have seen a shift, and many employers now consider it a voluntary benefit. That means the employee pays the full cost. If this is the case, you should still enroll through your employer, as the group plan will generally be very affordable. If your needs are more than the coverage offered by your employer’s basic plan, check to see if there is an option to buy more coverage through your employer. Generally, the extra premiums are cheap – usually under $200 a year.
If employer coverage is not an option, or still need more coverage, consider buying a private policy on your own. If this is a route you decide to go, know that you may have to prove your income. Also, you need to know how your policy defines disability, and what is covered.
Tom: What are the different coverage options?
Mellody: There are three types of coverage: own occupation, any occupation, and income replacement policies.
Own-occupation policies are the most expensive type of disability coverage because they provide the broadest coverage. Under these policies, if you cannot perform the duties of your preferred occupation, you can take a job in a related field, make a decent income, and still collect the benefits.
Any-occupation coverage pays benefits if you can’t work at any occupation for which your education level and training has prepared you. Under this type of coverage, if you perform your current job, but you can do something in the same field with your same skill set, you will not receive benefits.
Finally, income-replacement policies, which are less expensive than own-occupation or any-occupation, replace whatever portion of your income you are no longer able to earn.
Tom: Anything else?
Mellody: two more things: first, if you think that you can fall back on the safety net, think again. Social security disability only goes so far, as payment amounts are very low – in the $700 a month range for younger workers.
Secondly, you will need to choose between a non-cancelable and a guaranteed renewable policy. If a policy is “non-cancelable,” you will pay a fixed premium throughout the contract term. If it is “guaranteed renewable,” your premiums could go up. Depending on your needs and finances, you should choose the best option for you.
The bottom line with disability insurance? You must have it in order to protect your finances and provide for your loved ones in the event something happens to you and the odds are 1 in 4 that it will.