Disability Benefits Get Costlier and More Complicated

By Linda Stern | October 26, 2011

Like just about every other workplace benefit, disability insurance is becoming something workers have to manage and pay for, at least partially, themselves.

In the current open enrollment season for 2012 benefits, more employers are asking workers to put some of their own money up for high-end disability coverage. “We are seeing some gradual slide to more employee financial responsibility for long-term coverage,” reports Rich Fuerstenberg, a partner with benefits consultant Mercer. “The employers who used to provide the entire cost now may provide a core benefit and allow workers to buy up their coverage.”

Employers are also limiting short-term disability benefits and lengthening the waiting period before long-term coverage kicks in, says Stephen Mitchell of Unum Group.

More than half of all employers, 53 percent, required their workers to pay the full cost of their long-term disability coverage by 2009, according to the most recent data from insurance industry research group LIMRA. That’s up from 41 percent from 2002.

Workers looking at disability insurance in the current open enrollment season have a number of decisions to make: Should they buy into the group plan or buy private coverage? Should they pay for bigger monthly benefits, an earlier start or coverage that pays them if they can’t work in their chosen field? Or should they take a pass completely, on the theory that they are healthy, unlikely to become disabled and would prefer to work.

But the bottom line that should inform their decision is this: The point of insurance is to protect yourself from the catastrophe you can’t afford. If your flat-screen TV or iPhone breaks, you can probably find a way to replace them without insurance. If you lose a few weeks of work to illness, you can probably muddle through.

But if you end up totally and permanently disabled, unable to earn money and facing a raft of medical bills, you’re going to need some help. And Social Security disability benefits, at an average of $1,070 a month, aren’t going to cover it. That’s why most experts recommend that workers — especially younger workers who have decades of expected earnings ahead of them — nail down some disability coverage, despite the very slim chances that they will need it.

In fact, though disability coverage is often sold with scary numbers — the Social Security Administration estimates that a person in his or her 20s has a 30 percent chance of becoming disabled over the course of a career — the real chances of a serious permanent disability are far lower. According to Census Department figures, 6.9 percent of working age people are prevented from working because of a disability at any one time.

And disability coverage is actually priced on the basis of even lower numbers. According to industry data, the chances that someone will become “totally and permanently” disabled are more like five out of 1,000, says Mitchell Andrews, a disability broker with Plexus Groupe in Chicago.

Some people — particularly white collar professionals — eschew disability insurance on the theory that they will be able to work no matter what: The “I can always stagger over to my computer” theory.

“We hear this a lot from business owners or attorneys,” says Barry Lundquist of the Council for Disability Awareness. “They say things like ‘I can work no matter how sick I am’ but the reality is different.”

Increasing numbers of disability claims come from people with musculoskeletal problems (think back or wrist problems that make sitting at a desk painful) and emotional or psychological problems that can strike any profession, the council reports.

Furthermore, disability insurance is priced based on profession. The manual laborer has a higher chance of having a health problem that renders him unable to work; his policy for the same amount of benefits would cost more. (Workers can guesstimate their own chances of becoming disabled with the council’s online calculator at http://www.whatsmypdq.org).

So, disability coverage is one of those bets that make sense but that you hope to lose money on. Here are some considerations for workers weighing their company plans and disability dollars right now.

Employer-provided versus private.

This is a tough call. If your boss pays for your coverage there’s no reason not to take it. And Andrews says corporate plans often are more full-featured than privately-available ones. But if your employer wants you to pay for your coverage, you might as well weigh the benefits offered by private plans.

Richard Quadrino, a Garden City, New York, attorney who represents consumers whose disability claims have been rejected, suggests that private coverage can be superior. If you buy your own coverage, any benefits you collect are tax-free; if you end up collecting from an employer-paid policy, you’ll have to pay income tax on those benefits.

When to start, how long they will last.

Short-term disability insurance typically covers benefits starting within a few weeks to three or six months. Long-term disability coverage, which offers benefits until retirement age, typically starts at three to six months.

You can save money if you buy long-term coverage, but rely on savings or other sources of cash for short-term disabilities. And you can save about 10 percent to 12 percent of your premium by going from a six-month waiting period to a 12-month waiting period to start benefits, says Lundquist.

Be aware, however, that even long-term disability may not last as long as you expect. They typical length of a disability claim is two-and-a-half years. Insurers will do whatever they can in terms of rehabilitation and job training, to move beneficiaries back to work. And though Cadillac policies (and most privately-sold ones) offers “own occupation” coverage — meaning that you will receive benefits unless you’re able to go back to work in your chosen field — many employer-paid plans only cover “own occupation” benefits for the first two years. After that you’ll be expected to try to find work in any field.

How big a benefit can you collect?

It’s typical now for companies to pay for long-term coverage that would pay workers 50 percent or 60 percent of their income, and to allow workers to pay for another 10 or 20 percent of their monthly benefit. But be aware that many policies also limit total monthly coverage — the median weekly maximum is $1,154, according to Mercer.

You may need more money than that, especially because Mercer reports that two in five employers will kick you out of their health insurance plan while you’re out on disability.

That’s literally adding insult to injury.

(Editing by Lauren Young and Beth Gladstone)

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