Myths and facts about disability insurance


30 November 2020

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When people think of insurance, they think of life insurance or car insurance or homeowners insurance. Rarely do they think of disability insurance (DI), yet this is an important part of a person's insurance portfolio. The odds of a person experiencing prolonged disability due to illness or injury during their working life are remarkably high: approx. 25% of the population will suffer from a disability that jeopardizes their income. Still, when people are told about disability insurance, they see it as an expense rather than a way to reduce their risk of losing their income. So let’s take a look at some of the myths surrounding disability insurance that refer this very important insurance to the bottom of their priority list of risk reduction.

About 33% of employees have some degree of disability insurance through their employer. For the lucky 33%, the first myth is to think that this is all the DI coverage they need; however, this is often not the case. Many group DI policies are very restrictive and only pay if a person can not work in any profession at all. This means, for example, that if a surgeon develops debilitating arthritis in the hands and can no longer perform surgery but can still work in another profession, teaching says, then group policy does not pay a benefit to her. Furthermore, if the employer pays the premium for the policy with dollars before tax, any benefits paid become taxable income. As DI policies pay only between 60% and 66% of their gross salary, taxation of this benefit can reduce net revenue by more than a third. Both of these issues make group DI policies a less than ideal alternative to individual DI policies. And the remaining 67% of uncovered employees have no income replacement if they are unable to work due to illness or injury.

The second myth is the idea that it is more likely to die prematurely than to become disabled and lose income during one's working year. In fact, the risk of severe disability due to injury or illness is surprisingly high. In fact, the risk of a severe disability that puts someone out of work from the age of 20 to retirement at age 67 is approx. 25%. And according to a report from Unum Insurance, 60% of their disability claims are for women! Compare this with the risk of dying prematurely: approx. 17% for men aged 25 to 64 and approx. 11% for women in the same age group.

The next myth confuses workers' compensation insurance with disability insurance. These are completely different products: the former are designed to provide pay and medical benefits as a result of an injury or illness that is directly caused by activities during employment. DI provides wage replacement, typically up to 66% of income for any injury or illness that prevents a person from working for an extended period of time. Less than 5% of the disability claims are directly work-related and are covered by the employee's compensation 90% of the disability claims are the result of diseases that are not related to employment and are therefore not entitled to compensation for workers. The point here is that you have a chance of suffering from a non-work-related disability that puts you out of work for an extended period of time is at least 18 to 19 times greater than suffering from a work-related injury or illness. The employee's total insurance is therefore not a substitute for disability insurance.

The last myth I want to discuss is the myth of being too young to buy disability insurance. It turns out that over 40% of disabled people under the age of 50 make demands, and people under 40 make almost 14% of the demands. Moreover, like life insurance, the younger you are when you buy disability insurance, the cheaper the premium and the more likely you will be taken out. In other words, as you get older, there is a good chance that an insurance company will not take out a policy due to pre-existing conditions or assess a policy, which increases the premiums that will already be more expensive due to age.

Now remember that insurance companies are very conservative when writing disability insurance. This means that different professions are valued differently and will have different premiums to take risk into account; some occupations cannot be guaranteed at all, especially those at high risk of work injury and / or illness. Often, people in high-risk occupations need to get disability insurance through specialist operators who have experience in drawing and pricing policies for these individuals
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