Everything You Wanted to Know about Disability Insurance (But Were Afraid to Ask)

May is Disability Awareness Month. While most people know about life insurance, fewer people consider the importance of disability insurance. Here are some noteworthy facts about disability from credible, third-party sources, compliments of Bob Gertie of Advisor Insurance Resource.

Causes of Disability

Many people think of disability as something that only happens to a manual laborer or

blue collar worker. But a disability can happen to anyone. Consider these facts:

• While many people think that disabilities are typically caused by freak accidents, the majority of long-term absences from work are actually due to illnesses, such as cancer and heart disease. (Life and Health Insurance Foundation for Education, November 2005)
• Stroke is a leading cause of serious long-term disability. (Centers for Disease Control and Prevention, 2007)
• Common causes of individual disability insurance claims are:
  
  
• Over 85% of disabling accidents and illnesses are not work related, and are therefore not covered by worker’s compensation. (National Safety Council^®, Injury Facts^® 2008 Ed.) 

 Need for Protection

 A disability can happen to anyone, at any time.

• At age 40, the average worker faces only a 14% chance of dying before age 65 but a 21% chance of being disabled for 90 days or more. (Insurance Information Institute, www.iii.org, November 2005)
•  In 2007, 12.8% of people ages 21–64 surveyed had a disabling illness. (U.S. Census Bureau, American Community Survey, 2007)
•  In the U.S., a disabling injury occurs every second, and a fatal injury occurs every 4 minutes. (National Safety Council^®, Injury Facts^® 2008 Ed.)
•   In the home, a fatal injury occurs every 12 minutes and a disabling injury every three seconds. (National Safety Council^®, Injury Facts^® 2008 Ed.)
• There is a death caused by a motor vehicle crash every 12 minutes and there is a disabling injury every 13 seconds. (National Safety Council^®, Injury Facts^® 2008 Ed.)
• Almost 3 in 10 workers entering the workforce today will become disabled before retirement. (Social Security Administration, Fact Sheet, January 31, 2007)
•  In 2007, the employment rate of working-age people with disabilities in the U.S. was 36.9%. (U.S. Census Bureau, American Community Survey, 2007)
•  Forty-three percent of all 40-year-olds will have a long-term disability event prior to age 65. (JHA Disability Fact Book, 2006)

Disability Duration

The average disability lasts longer than you think.

• The average duration of a long-term disability is 30 months. (JHA Disability Fact Book, 2006)
• Nearly 1 in 5 Americans will become disabled for one year or more before the age of 65. (Life and Health Insurance Foundation for Education, November 2005)
• Three out of 10 workers between the ages of 25 and 65 will experience an accident or illness that keeps them out of work for three months or longer. (Social Security Administration, Fact Sheet, January 31, 2007)

Social Security Misconceptions

People have many misconceptions about the Social Security benefits they may receive if they become disabled. For example:

•  More than 1 in 5 adults believe that unemployment or Social Security will cover them if they become disabled. (Disability Literacy: How Consumers Rate Today, April 2005, The Hartford)
• Less than half―39%―of the 2.1 million workers who applied for Social Security Disability Insurance (SSDI) benefits in 2005 were approved. (Social Security Administration, Office of Disability and Income Security Programs)
• The average monthly SSDI benefit is $1,004. (Social Security Administration, Fact Sheet 2008)
•  In 2007, the percentage of working-age people with disabilities receiving SSDI payments in the U.S. was 17.1%. (U.S. Census Bureau, American Community Survey, 2007)

The Bottom Line

Disability is a major risk both in terms of probability and financial impact. Social Security is not a viable solution in many cases. Employer plans have limits―and you won’t work for your employer forever. Individual disability insurance coverage is often needed to supplement employer coverage, plus it is portable when you change jobs. Simply compare the cost of disability to life insurance and you can see the probability risk and financial risk of disability. Disability insurance is expensive but important!

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Where Does Your Money Go?

Are you saving more money than you want to or planned? Probably not. Does it seem that even when your income goes up you can’t save more money?

Where does your money go? How much money are you saving? If you have a hard time answering these questions―and most people do―there are some easy solutions.

First, try a manual or “back of the envelope” approach. Start by identifying your annual income from your W-2 tax wage statement or year-end payroll stub. Then identify how much you contributed to investment accounts like your 401(k), IRA or 529 college savings plans. Next, calculate how much cash you accumulated or depleted by comparing your bank account balances from the beginning of the year to your balances at the end of the year. If your bank account balances were higher at the end of the year than at the beginning, you accumulated cash. If they were lower, you depleted some cash.

To calculate the percentage of your income that you saved, divide the amount you contributed to investment accounts plus any cash that you accumulated minus any cash that you depleted by your annual income total. For example, if your annual income was $100,000 and you contributed $15,000 to your 401(k) and accumulated $5,000 in your bank accounts, you invested or saved $20,000 or 20% of your income. That is very good and you may be able to stop here, unless you want to learn more about where you are spending your money so that you can try to save even more.

If your income was $50,000 and you contributed $1,500 to your 401(k) and $500 to a 529 college savings plan and your bank balances remained about the same, then you saved 4% of your income. Obviously, the higher your income, the greater percentage you should be able to save. However, it doesn’t always work out that way, as people tend to ratchet up their lifestyle spending as their income increases. As a general rule, you should try to save 10% to 25% of your income. Saving 5% is better than nothing, but it’s probably not enough to accumulate a retirement nest egg in the long run.

What technological resources are available to help you boost your savings? You have a wide range of options to choose from. Your bank website may have a resource to help classify and summarize expenses. Your credit card company may provide an annual statement that shows you how much you spent in certain categories. Check out the “restaurant” or “entertainment” categories and you may be shocked how the discretionary expenses add up. 

Two popular software packages that can help you track your spending and saving are Quicken and Mint.com. Quicken is a PC-based software and Mint.com is web-based. They are both owned by the same parent company, Intuit.

Mint.com is free and automatically collects your transactions from your bank and credit card accounts. It assigns an expense category based on the merchant code that is tracked when you swipe your credit card or debit card. For example, if you swipe your card at Kroger’s it will be classified as groceries and if you fill up your tank at Speedway it will show as gasoline. You can manually edit any entries in Mint.com and you do have to manually categorize any checks your write and any cash transactions.

Quicken is similar to Mint.com, but you have to manually download your transactions. Credit card transactions are automatically categorized, just as they are with Mint.com. Quicken has a much wider range of reporting capabilities and more flexibility in choosing historic time periods for reporting. Quicken also has an “Easy Answer” function to answer the questions “How much did I pay to…”  or “How much did I spend on…” for a wide range of time periods that you can select. Quicken also offers bill pay and check writing capability to further simplify your cash management. Different versions of Quicken are available that cost between $60 and $90 before rebates and discounts.  

Whether you use manual or software methods to track your income, expenses and savings, the process is enlightening and well worth your effort!

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.