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One-Third of All Americans Can Prevent This Kind of Financial Disaster

I’m going to tell you a personal story about my experience with disability. Back in the early ’90s I was eligible for a paltry $600 benefit from my employer as a disability payment. This was hardly enough to cover the expenses that I was obligated to pay at the time.

A personal finance columnist for my local paper had just done an article about disability that was skewed toward white-collar workers. I asked her, via mail, if she had ever done anything on disability for blue-collar workers. She had not. Plying a blue-collar trade often means that your chances of becoming disabled increased because of the nature of the work (whereas, most disability policies focused on becoming disable from events that did not come from work-related problems). So I began my search for a policy that would pay me in addition to the existing policy.

This was no easy task. The group policy I was on did not allow me to increase the benefit I would receive. This forced me to find a policy to compliment the group policy. What I found out was daunting. This sort of policy would be expensive.

My research uncovered some interesting facts. One, I already had a disability benefit built into my Social Security. (Every year, your benefit potential is mailed to you prior to your birthday and outlines various scenarios for payments from what I would receive if I drew on the program early, waited until full retirement or became disabled.) This payment seemed adequate enough to cover my family’s needs at the time.

So I called the SSA and asked what it would take to receive permanent disability. This requires a hearing, which can be difficult to get and even harder to prove. The SSA representative I spoke with suggested that to be truly disabled, you would literally be knocking on death’s door. It was a bit of an exaggeration but at least it gave me some insight on what to expect.

So I found an agent who represented Provident (now Unum Provident) and asked if he would strike the following deal with his company: if I were to get a policy from his company, would they be willing to take a bet with me? The gamble was laid out in the following way: they would pay me a benefit of $1,000 a month, with a cost of living adjustment and if SS deemed me eligible for their benefit, they would be off the hook for their obligation by reducing what they owed me by 80 percent. The policy would last for five years and if I was unable to return to work, they would retrain me in another job.

The agent had never heard of such a thing. But I insisted he make the proposition. He did and the company went for it. And the Social Security rider was born. This brought the monthly payment for the policy down to a manageable monthly amount. (On a side note, the amount of effort it took to get this sort of information actually led to the creation of the in 1998 as a way to find information that would otherwise be hard to find without first dealing with someone who had to sell something.)

According to the American Council of Life Insurers about one third of all Americans between the ages thirty-five and sixty-five will become disabled for more than ninety days. One in seven will experience a disability that lasts longer than five years. Keep in mind that these sorts of policies go beyond the freak accidents that might occur on the job or off.

The vast majority of those who tap disability insurance do so because of some medical need such as cancer or heart disease. The reason for disability insurance is to help you retain your home and pay your bills while you recover from this loss. Typically, and if you are fortunate, an employer offers a plan covers about 60 percent of your income. Even if you have some sort of supplemental insurance, you will only get about 70 to 80 percent of what you need to get by covered.

What you can’t get in these policies is full income replacement. The thinking here is rather simple: if your income is completely covered, what incentive do you have to return to work? And those benefit periods usually only last five years or until you retire, whichever comes first.

Even if you have a group plan, individual coverage might be something to consider.

First check on the group plan. It might not be what you think it is and it probably won’t do all you want it to do. According to MetLife, most group plans have a benefit cap of about $5,000 a month or $60,000 a year, and that type of plan excludes bonuses. A group plan will only insure your regular salary.

Now there are two kinds of disability insurance, short-term and long-term.

Short-term disability insurance—also known as sick leave—kicks in as soon as you’re unable to work due to an illness, injury, or the birth of a child. Most employers provide some type of coverage, ranging from just a few days to as much as one year. In some cases, the number of weeks you’re eligible for this benefit is based upon how many years you worked at a company.

Long-term disability insurance kicks in once your short-term disability benefits run out. Unfortunately, there are no state laws that require employers to provide long-term disability, but it’s estimated that half of all midsized to large firms do provide at least some insurance.

Self-employed people should consider a disability policy. Even if you are employed where you have a plan, having some individual coverage might be just the sort of peace of mind you need. Not only is it portable, but it adds 10 to 20 percent more coverage to your employer’s plan.

The question is, how do you know how much you need? Like all insurance, it depends on who you are and how much you can afford. If you are healthy, it will cost you less. If you can afford to wait until the policy kicks in, called the elimination period, the longer the better, the policy will be cheaper. This is why people like me are always stressing emergency accounts to cover just this sort of emergency.

There are riders you can buy that will increase the cost of the policy. But they might be necessary. Some policies will retrain you if you can’t return to your old job. This might add 40 percent to the cost of the policy. There are cost-of-living adjustments available. There are even riders that allow you to increase coverage should your salary jump in later years. Yet, some costs can be shaved with a rider that allows for a lower premium payment if Social Security considers you disabled.

One good thing: these policies, once you have them, can’t be canceled.

By Paul Petillo, managing editor of and You can listen to Paul on Moms Making a Million Radio.