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Business Observer Friday, Jun. 1, 2018 1 month ago

Risks, and costs, of ignoring disability insurance linger

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The economic realities of the inability to work have serious repercussions.

Many Americans are blissfully unaware of their exposure to devastating income loss during a disability.

Yet the chances of being disabled are more than 1 in 4, even for today's young workers.

This risk is significantly higher than dying before retirement. A recent study noted medical bills (26%), lost job (20%) and disability of the worker or family member (15%) were the primary causes of bankruptcy filings. Ironically, living expenses go up during a disability while income goes down. If a worker were strictly "playing the odds" they'd buy disability income insurance rather than life insurance.  

We find that most individuals can visualize themselves as disabled by an accident (Who hasn't driven on U.S. 41 in Sarasota during season?), but the facts actually show illnesses are the primary causes most often. Musculoskeletal (29%), cancer (15%), pregnancy complications (9.4%) and even mental health issues (9.1%) are more prevalent causes of disability than accidents (9%). 

The economic realities of the inability to work are often overlooked. Workers’ compensation claims (on the job only), required of businesses with more than three employees, account for less than 1% of Americans suffered an on the job compensable injury. Workers’ comp only pays two-thirds of pay for a maximum 104 weeks, nothing for illness or injury off the job.

Social Security is no panacea either, since only about a third of those filing for disability benefits from Social Security are awarded benefits. Workers covered by group disability contracts (LTD) rarely note that it covers only 50-60% of income, sometimes only salary and may exclude coverage for incentive compensation, i.e. bonuses, commissions, etc. Even LTD for 60% of income is subject to income tax where the employer paid for the coverage. That results in net less than half of one's salary.

Since many Americans already live paycheck to paycheck, just a loss is devastating even in the short run, much less a long-term disability.

Often overlooked is retirement plan contributions (including Social Security retirement) are not continued for disabled workers. This results in further income reduction at retirement age when even insured benefits stop and one is forced to live on reduced Social Security retirement benefits (if eligible) and their own resources. 

Supplemental disability income insurance for professionals typically costs less than 1% of the covered income.  

Business owners are also exposed to liabilities for continuing expenses (rent, utilities, employee salaries and benefits, insurance, even loan payments) during a disability. Business Overhead Expense (BOE) insurance can cover such expenses. Business Overhead Expense insurance is generally less expensive than disability insurance due to a shorter duration. Premiums costs for BOE are generally tax deductible as a Section 162 "ordinary and necessary" business expense. 

And, ironically, most businesses have business interruption insurance (loss due to hurricane, fire, flood or someone driving through their front door), while one of the business' most valuable asset, the business owner, is left exposed to (more common) illness or injury.

Jim Tollerton is the president of Sarasota-based Professional Benefits. Taylor Collins is vice president of the firm. The company insures over 2,000 professionals/executives nationally and has handled over 200 claims for disabled workers. 

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