Why You Need Disability Insurance to Protect Your Family

July 23, 2008 by  
Filed under Insurance

Most adults with dependent children have a basic appreciation of the need for life insurance to protect their dependents.  (Of course, many of these same adults purchase too much, too little, or the wrong kind of life insurance but that will be a topic for another day.)  What disturbs me is that all too often the need for disability insurance is completely ignored. This is dysfunctional money behavior by folks who should know better.

Why is it dangerous to ignore the need for disability insurance or choose not to purchase it?   Let’s look at the facts.  In the U.S., one-third of all adults in the 35-65 age group will experience at least one period of disability that extends beyond 90 days.  One in seven people will be disabled for at least 5 years before reaching age 65.  With so many Americans living pay check to pay check, and with little or no emergency fund, even a relatively short period of disability can be devastating.  Indeed, according the the U.S. Department of Housing and Urban Development, 46% of all home foreclosures are caused by a disability.

With this data, why are so few working adults purchasing long term disability insurance, even for their own protection?  Some will say – “I am young – nothing is likely to happen to me.”  Yet insurance companies also report that for people between the ages of 25 and 50, disability is twice as likely to occur as compared to death.

Is a tough money love response needed here?  I believe that it is because the irrational failure to purchase disability insurance by an otherwise responsible adult has an even greater impact on his/her dependents if a disability occurs.  Accordingly, in this case the dysfunctional money behavior should be ignored and circumvented.

What should be the tough money love response to this behavior?  Here is one suggestion:  Most employee-sponsored health insurance plans include a token amount of life insurance coverage that is bundled into the premium.  The employee has no choice but to accept it.  More recently, rules regulating the administration of 401k plans were amended to allow employers to automatically enroll new employees into the plan, subject to the employee’s right to later opt-out.

Thus, I recommend that state insurance laws be amended to allow employers to automatically enroll employees in group long term disability coverage for the benefit of any dependents of that employee.  An employee could opt-out but statistics have shown that once an employee is enrolled in a workplace benefit, he or she is more likely to sustain it.  There are tax advantages if the employee and not the employer is paying the premium for disability coverage but that discussion will have to be covered in a future post.

If you are a baby boomer or older, you should also consider long term care insurance.

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