Rene Neff, a fifth-grade schoolteacher in Graham, North Carolina, was 39 years old in 2000 when she found the lump in her breast. Doctors told her it was an aggressive form of breast cancer.
She needed chemotherapy and radiation therapy, treatments so time-consuming and rigorous that she would have to leave her teaching job. Like most families who have grown accustomed to life on two incomes, the loss of Rene's salary -- coupled with the impending medical bills and incidental expenses -- was threatening to create a serious financial hardship for Rene, her husband, and their two sons.
As daunting as her situation was, it might have been bleaker still but for the fact that Rene had disability insurance. The coverage, which typically pays -- often tax-free -- about two-thirds of a policy-holder's income, was enough to keep the family afloat, and kept Rene's medical struggles from being compounded by financial ones.
"It was bad enough my boys had to deal with a mother who was sick. I was so grateful I didn't have to also tell them, 'Boys, sit down, we're selling the house and going down to one car.' You want to try to keep the rest of your family situation as normal as it can be," she says.
Americans insure their homes, their cars, even their diamond engagement rings and antique collections. But far too many leave their single-most valuable asset -- their income -- underinsured or not insured at all.
If the family breadwinner is disabled, paychecks stop. Most disabilities aren't covered by workers' compensation, either. These plans pay only when a worker is injured on the job. And, according to the National Safety Council, disabilities happen off the job 60 percent of the time.
So why aren't more workers getting coverage? Aside from the extra cost of a policy, money experts say most people have a lottery mentality, tending to think they can beat the odds, that they won't be the unlucky one. What they don't realize is that the odds are against them.
Despite the risks, a large majority of U.S. workers -- 82 percent -- either have no long-term disability income coverage or inadequate coverage, according to a 2000 survey by the Consumer Federation of America and the American Council of Life Insurers.
Alan Ziegler, president of the Society of Financial Service Professionals, says disability insurance is financially as fundamental as retirement planning, life insurance coverage, and saving for children's college expenses. "A very high percentage of people are going to be impacted by a disability. And when you match that against the fact that it's horribly undercovered, it's a real problem."
To make sure your family is covered, start by determining whether you have enough disability insurance and how to buy more if it's needed. Then, you need to answer some key questions:
There are two types of disability insurance, long term and short term. When a person becomes disabled, both types of insurance pay half to three-quarters of salary.
Long-term insurance replaces income for disabilities lasting longer than six months. Typically, there is a three-month waiting period before benefit checks start, but many of the better policies will continue paying until age 65 if a disability continues that long.
Short-term insurance is less common, kicking in just days after a disability and lasting up to six months. Ideally, nobody would need short-term disability because they would have enough savings to get through a short period without a paycheck. But coverage becomes important for families living on the margin, when missing just a few paychecks could ruin the family finances. For those with little savings who are dependent on every paycheck, both long-term and short-term disability insurance may be desirable.
Basically, a family needs to look at monthly expenses and figure out what's needed to meet basic expenses, and how long accumulated savings will last. For most, it's not long. Roughly 53 percent of Americans are living paycheck to paycheck some of the time, according to a Consumer Federation study. But even if someone diligently saved 10 percent of her income annually, a single year of total disability would almost wipe out a decade's worth of savings.
"Everyone needs to sit down and figure out how long they could go without receiving an income," says Carol Harnett, spokesperson for The Hartford's Group Disability and Life Insurance. "Ask yourself, 'How much do I have in reserves to get me through?'"
One important caveat to remember: Disability insurance typically replaces only salary, not other income like overtime pay, bonuses, commissions, and stock options.
"Try to get as much coverage as you possibly can to replace as much of your income as you can," says Brian Ashe, an Illinois financial planning expert who specializes in disability insurance. "The truth is, we need every dollar that comes into the house. There's not a lot of extra to go around or we'd see a much higher savings rate in this country."
Calculators on the Web, usually geared toward long-term disability policies, can help evaluate how much coverage is necessary or how much you can afford.
There are two ways to get disability insurance: through the workplace or by purchasing an individual policy.
Getting so-called "group" disability insurance through an employer is far cheaper, on the order of about $200 a year for long-term disability. Rene Neff's disability coverage was part of her job's compensation package, as it is for many employees.
Individual policies offer more options, and the policy follows the earner when they switch jobs. However, individual policies generally cost significantly more. The average annual premium for an individual disability insurance policy is between $1,300 and $1,400 per year, Harnett says. What's more, such policies cannot be cancelled.
So, experts say, the first step for income providers is to check employer benefits to see if they're already covered for a disability.
If an employer doesn't offer supplemental disability insurance -- and more than 60 percent don't -- it makes sense to prod the company's benefits department to consider offering long-term disability insurance. Even if employees end up paying the full premium themselves, it would be far cheaper than an individual policy because they'd have access to a group rate.
If a supplemental policy isn't available, consider an individual policy for long-term disability coverage.
It's best to deal with a trustworthy insurance agent or financial adviser because the terms and conditions of such policies can get complicated.
Take note of how much income the policy would replace. It's usually not more than 70 percent. Also, ask about the waiting period before benefits start. A typical waiting period for long-term disability is 90 days, which means disability checks won't start arriving for three months. Most families need to make sure they have enough savings to make it until benefits kick in.
Financial planner John E. Sestina, a fee-only financial planner in Columbus, Ohio, and author of the book, Managing to Be Wealthy (Dearborn, 2000), offers this strategy: Get proposals from three different insurers. Then have an agent at each insurer critique a competitor's proposal.
"You're not doing this to take advantage or to embarrass anyone," Sestina says. "But the consumer will really understand disability when they go through that exercise" because the critiques reveal facts about the policies that would not have been as obvious at first glance.
While premiums for individual policies can induce sticker-shock, experts say it's worthwhile for many families. "You usually get what you pay for," Sestina says.
Do your research too: Spend some time in the library or on the Internet researching the company you're considering buying a policy from. Check to see if there are lawsuits against them as a result of unpaid claims, for example. And consider consulting an attorney who specializes in disability claims. If you're ever disabled, it's worth talking to your attorney before filing a claim with the insurer, just to avoid possible problems.
A good resource for long-term disability insurance information was published by the Consumer Federation of America in 2000. You can download a free copy of Long Term Disability Income Insurance -- Financial Protection for You & Your Family at these sites:
If you don't have Internet access, you can order a hard-copy version of the guide. Call 800-589-2254 and ask for publication number 7200004.
Originally published in Better Homes and Gardens magazine, April 2004.