Do you have disability income insurance denial?

Shelly Gigante

By Shelly Gigante
Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
Posted on Jun 21, 2021

We all know that life insurance is a must when it comes to protecting our family’s financial well-being, but paying an additional premium for disability income (DI) insurance can feel like a low priority given the many demands on our budget.

Younger workers, in particular, often dismiss the need for private disability income insurance, unaware that their employer-provided DI benefits may provide neither the type nor the amount of coverage their household needs:

  • Some workplace DI policies provide benefits only if the policyowner can no longer produce a paycheck at all, including at minimum wage jobs, while others limit coverage to the employee's base salary (not their bonuses or commissions).
  • Benefits through employer-sponsored DI coverage may be taxable.
  • Workplace DI policies may not be portable. When the policyowner leaves their job, they may be forced to purchase a new disability income insurance policy on their own, at which point their premiums would be higher because they are older. (Related: 6 ways group DI insurance may fall short)

Others underestimate the probability that a prolonged illness or injury may interrupt their income stream. That’s a potentially costly gamble.

According to the Social Security Administration, 1 in 4 (25 percent) of today’s 20-year-olds can expect to be out of work for an extended period because of a disabling event before they reach retirement age.1 By comparison, the likelihood that an insured worker born in 2000 may die before normal retirement age is just 13 percent.2

“People don’t like to think about disability, and they don’t want to believe that it could happen to them, but having had multiple clients with disability claims, the importance of DI coverage is very real to me.” said Peter Glassman, a founding partner of Wealth Insight Partners in Bethesda, Maryland.

Education is key

Roughly 1 in 3 working Americans do not have adequate disability income insurance coverage, according to the Council for Disability Awareness.3

Larry Singer, a partner and financial professional with New Jersey Life & Casualty in Livingston, New Jersey, said that the best way to combat “DI insurance denial” is education.

Working adults better appreciate the importance of disability income insurance, he said, when they understand the financial opportunity that their paycheck provides.

For example, a 30-year-old making $100,000 per year stands to earn a total of $3.5 million over the next 35 years. A highly paid doctor or lawyer might have earnings potential of $15 million to $30 million over the course of their career. But it doesn’t stop there, said Singer. They must also consider the investments they could make with their disposable income, which could potentially double the opportunity cost if their income suddenly stopped.

“Your family is supported by a very thin thread, which is your income,” said Singer. “Your mortgage, car payments, and insurance premiums don’t stop just because you experience a loss of income. You could have a $500,000 mortgage and $100,000 in equity in your home, but if you can’t pay your mortgage, you may very well lose all that equity because you have to take out a home equity loan to support yourself or you have to file for bankruptcy.”

Fully two-thirds (67 percent) of Americans who file for bankruptcy cite medical bills as the primary reason for their financial collapse.4 Many of those who filed for medical bankruptcy have health insurance, but buckle financially under the weight of copays, deductibles, and coverage limits. The added expenses build up quickly.

Most American households are vulnerable to a temporary loss of income because they do not have adequate savings set aside. Nearly 74 percent of individuals in pre-pandemic America reported that they would experience financial hardship if their paychecks were delayed by even a week, according to the latest report from the American Payroll Association.5

Financial protection products, such as disability income insurance, help ensure that an injury or illness that prevents you from working does not derail your family’s ability to make ends meet. It’s the foundation upon which all other financial goals are built, said Singer.

“A financial plan is really meaningless if you don’t have disability income insurance,” he said. “At its most basic, financial planning is about having contingencies in place to provide for yourself and your family in the event of a job loss, disability, or premature death. That means having an emergency savings fund in place, along with disability income insurance and life insurance coverage.”

Holes in the safety net

Before you dismiss the need for DI insurance coverage, you should also be aware that the public safety net has limitations.

Many assume that workers’ compensation or Social Security Disability Insurance (SSDI) would replace a portion of their paycheck in the event that a disabling event prevented them from working. That’s not necessarily true.

The Council for Disability Awareness notes that adults are far more likely to experience a serious illness or injury outside of the workplace, in which case they would be ineligible for workers’ compensation. The most common reasons cited for DI insurance claims? Pregnancy complications; musculoskeletal disorders affecting the back and spine, knees, hips, shoulders, and other body parts; digestive disorders; mental health issues; and, then, injuries.6

Those who become disabled off the job don’t always qualify for SSDI either, with average wait times of 600 days for a hearing.7 Those who do qualify for SSDI collected an average monthly disability benefit in 2019 (the most recent year for which data are available) of $1,234—barely enough to keep most families above the poverty line.8

MassMutual’s disability income insurance calculator can help you determine how much coverage may be appropriate for your household. For more personalized guidance based on your unique financial picture, you can also consult a financial professional.

Buy early to save more

Part of the reason many people postpone the purchase of DI insurance is the perceived cost.

Premiums vary widely depending on your health history, age, occupation, and the type of policy you select, but the average DI policy costs anywhere from 1 percent to 3 percent of your annual income, according to Policygenius.com.

Singer said young adults, including those with employer-sponsored DI coverage, have a unique opportunity to save on DI premiums, due to their age.

“When my kids graduated from college, I bought them each a disability policy with a monthly benefit of $3,000, plus a future income option — FIO — that allowed them to purchase up to $6,000 more in monthly benefits without medical underwriting, as their income allowed,” said Singer. “For a premium of about $1,300 per year, I essentially put them in the position to control up to $9,000 in monthly benefits at a very nominal cost. Now their friends are starting families and starting to buy disability income insurance, and they can’t believe how little my sons are paying for theirs. That’s something that I recommend to all parents.”

Be aware that disability income insurance — whether company-paid group plans or private policies purchased independently — is not designed to replace your entire income. Most typically cover about 60 percent of your annual pay.

As such, Glassman said he recommends working adults purchase as much DI insurance coverage as the industry will permit them to buy.

“Get as much DI coverage as you can get underwritten for,” he said. “Most people are not in a position to live on a lot less than they make.”

Singer notes, however, that would-be policyowners should not be dissuaded from purchasing DI coverage due to cost. If you can’t initially afford the benefit amount you need, start small. Get what you can afford today, consider purchasing future income options to stretch your available benefit, and add coverage as your income allows.

“I believe that any amount of disability income insurance coverage is better than no disability income insurance coverage,” he said.

Discover more from MassMutual…

Disability facts that may surprise you

How to use disability income insurance for financial help

Need financial advice? Contact us

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Social Security Administration, “The Faces and Facts of Disability.” 

Social Security Administration, “Disability and Death Probability Tables for Insured Workers Born in 2000,” June 2020.

3 Council for Disability Awareness, “How Many Working Americans Have Adequate Disability Coverage?” April 26, 2018.

4 American Journal of Public Health, “Medical Bankruptcy: Still Common Despite the Affordable Care Act,” March 2019.

5 American Payroll Association, “Getting Paid in America,” September 21, 2020.

6 Council for Disability Awareness, “Chances of Disability.”

7 Council for Disability Awareness, “How Many Working Americans Have Adequate Disability Coverage?” April 26, 2018.

8 Social Security Administration, “The Faces and Facts of Disability.”

The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel.Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.