By PAUL SULLIVAN
Published: October 19, 2012
OF all the types of insurance people are thinking about, disability insurance may be the last on the list.
Christopher Berkey for The New York Times
While Linda Hatchett of Nashville was recovering from a hip replacement, her job was eliminated. Her disability insurer offered her career counseling and she accepted a lump sum disability payment. But she hasn’t found a job.
The Costs of Becoming Disabled
Do you have disability insurance? And if so, have you ever had to use it?
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One reason is that most people who have it got it through their employer and have given it little thought. Another is that people are not likely to go out and buy it on their own because it is so expensive, the exception being certain occupational groups, like doctors. Yet it does serve an important purpose in replacing a portion of your salary if you get hurt or become sick and are unable to work for several months or more.
Still, figuring out the real risk of becoming disabled is difficult. My colleague Ron Lieber wrote a Your Money column about the various and divergent estimates in 2010.
According to the Social Security Administration, a 20-year-old in 2011 had a 30 percent chance of being disabled for at least six months before retirement. That is a fairly scary statistic, but I couldn’t help thinking it was slightly misleading. After all, someone who moves refrigerators for a living is at greater risk for the most common disability claim — muscular-skeletal injury, according to Sun Life Financial — than someone who works in an office. But the second most common cause for a claim, cancer, doesn’t care what you do for a living.
If you are like me, you also wonder about the likelihood of an insurer paying a disability claim. Will it pay promptly when you submit the proper paperwork or give you the runaround until you give up, as was the case with one insurer, Unum, several years ago?
And to be clear, I am talking about private disability insurance. Anyone who is working and paying into Social Security is eligible to apply for Social Security disability insurance, though the average benefit is only $1,188 a month.
So how do you make an informed decision?
THE COST The first thing anyone who has looked into buying disability insurance has probably been struck by is the cost.
Dallas L. Salisbury, president and chief executive of the Employee Benefit Research Institute, a public policy research group in Washington, said that the cost for coverage in a group policy runs about $16.30 per $1,000 of coverage with a waiting period of 30 days and a maximum benefit of $15,000 a month. For individuals buying their own policies, he said, the cost is $18.60 per $1,000 of coverage but with a 90-day waiting period.
That may seem comparable, but it’s not. The 90-day waiting period is like a higher deductible on your homeowner’s insurance, and it makes the policy considerably cheaper than it would otherwise be. The 90 days is also long enough to eliminate most smaller, short-term claims.
Compare that with the costs for life insurance, which Mr. Salisbury said typically are about 22 cents per $1,000.
Chris Quinn, vice president for the employee group benefits division at Sun Life Financial, said another way to think about it was that the premium was 1 percent of someone’s salary in a group plan and 3.5 percent of that salary in an individual plan.
Mr. Salisbury said that while the number of disability claims had remained constant for decades, the costs remained high because of the small pools of people with disability insurance and the fact that insurance companies might be obliged to make payments for decades.
“The old theory was as soon as fewer people are doing backbreaking work, there will be fewer claims,” Mr. Salisbury said. “But it turns out more people are doing damaging work. Take carpal tunnel syndrome from repetitive usage. Some of the old theories hadn’t contemplated computer keyboards.”
The cost of policies that increase someone’s disability payment above the typical 50 to 60 percent of income is even higher. The reason, Mr. Salisbury and others said, is what is called adverse selection bias: the people most likely to buy additional coverage are likely to have some condition or family history that makes them believe they will need it.
THE CALCULATION The decision for most people on whether to buy an individual policy or add to an employer-sponsored one comes down to a personal risk assessment.
David Ropeik, a consultant and teacher who has written two books about assessing risk, said that when he and his wife had young children and were contemplating buying additional disability insurance, they decided against it.
“We engaged in the process because we were worried about it in the first place,” Mr. Ropeik said. “If we had been more emotionally worried, we would have fantasized about worst-case scenarios. We were fortunate that our incomes could support the other one if something happened.”
But Mr. Ropeik was careful to say that he was not arguing against buying disability insurance. “Our willingness to spend money to defray our worry depends on who we are as individuals,” he said. “It’s not a waste of money if you never collect. You’re buying something. You’re getting a value.”
For some people like Jonathan Skinner, a professor of economics at Dartmouth College who has done research on disability coverage around the world, that value is peace of mind. He said he bought as much additional coverage as he could under the college’s plan.
“As an economist, I’m happiest to insure the things that are rare occurrences that don’t cost much to insure against,” he said. “The disability top-up gives me peace of mind 100 percent of the time.”
When I asked him how someone steeped in economic reasoning could want to have maximum coverage for a low-probability event, he said, like others I spoke to who had done the same, that he had been driven by fear.
“The thing I fear the most is becoming disabled and requiring outside care that’s really expensive,” he said. “I don’t want my wife and my family to drop what they’re doing and take care of me.”
What both Mr. Ropeik and Professor Skinner did, though, was ask whether they could maintain their lifestyles if they could no longer work. But most claims do not last that long.
Sun Life said claims on policies with a 90-day waiting period last about three years, while those filed on policies with a 180-day waiting period run to 4.5 years. But insurers are quick to point out that every company is paying claims on people in their 20s who will be on disability until their policies end, usually at 65.
Andy Sullivan, senior vice president for disability and small market business operations at Prudential, said most people went back to work in two years. “If they go beyond that 24-month point, you see the extension of the disability to several years,” he said.
To help people make their own calculation, the Council for Disability Awareness, a trade group backed by the insurance industry, created a calculator called What’s My Personal Disability Quotient. When I put in some basic information about myself, I was told that I had a 12 percent chance of becoming disabled for at least three months.
Barry Lundquist, president of the group, said the site was created using the same actuarial tables that disability insurers use to price policies. But he, like everyone I spoke to in the industry, cautioned against taking consolation from a low percentage chance.
“The important take-away is that we all have a disability risk that is too high to ignore, whether 5 percent or 50 percent,” he said. “The potential loss of income is usually in the millions of dollars considering one’s career earnings potential.”
THE PAYOUT Of course, people do get disabled and collect payments.
What struck me was how frank insurers were about trying to get people back to work quickly so they could stop making payments. This is good — who wants to be loafing around? — but it also ran counter to how I imagined disability insurance working.
“We have incentives in our program that offer transition benefits,” Mr. Quinn said. “We now include rehabilitation incentives. If you go back to work and it’s at a lower salary, we’ll augment your salary for some period of time. The incentives we provide are focused on the notion that most people want to be back at work.”
This was the case with Linda Hatchett, who is 62 years old. But not all of these programs work out as planned. An experienced dialysis nurse in Nashville, she fell and broke her hip last year. She rested for several months, and then her doctors decided her hip needed to be replaced. While she was recovering, her job was eliminated.
In January, her hip healed, she started looking for a job that would use her skills but not be too strenuous. Sun Life offered her career counseling and she accepted a lump sum settlement from it in April, thinking she would easily find a job. But it hasn’t happened yet, despite a lot of networking.
“The longer I’m out of work, the more scary it becomes,” she said. “I love to work. I miss it. Financially, we’ve had to scale back.”
This article has been revised to reflect the following correction:
Correction: October 19, 2012
Because of an editing error, an earlier version of this column misidentified the individual who said disability insurance costs remained high because of the small pools of people with such coverage. It was Dallas L. Salisbury of the Employee Benefit Research Institute, not Chris Quinn of Sun Life Financial.