Editors' pick: Originally published May 13, 2016.
Few consumers want to spend much time thinking about disability insurance. It's necessary to have it, yes. But who wants to think of a time when they can't work and they can't produce income for themselves or their families?
But with almost 75% of Americans living paycheck to paycheck, having no backup plan in the event of a accident or failing health just isn't an option. That's especially true given that one in four Americans 20-years-of-age will become disabled before reaching age 67.
"Disability insurance is the most important insurance coverage, because the odds of becoming unable to work due to illness or injury are very high," says Daniel C. Steenerson, chief executive officer of DIonDEMAND.com, a disability insurance services provider based in San Diego. "Most Americans cannot pay their bills for any length of time without a paycheck. Without a paycheck, they lose their homes, exhaust their savings and incur all kinds of debt just to keep food on the table."
Steenerson compares the risk of disability with some other common risks. "Most homeowners purchase insurance for their homes, but according to the Science Channel, there's only a one in 300 chance of having a serious fire," he says. "Roughly 62% of Americans have life insurance, but odds of dying each year are actually quite low. In comparison, a mere one-third of working Americans are protected by long-term disability insurance. Yet, stats from the Council for Disability Awareness tell us that more than one in four of today's 20-year-olds will become disabled before they retire. From an odds of loss perspective, disability insurance is very important."
One primary problem is that Americans aren't generally aware of how disability insurance works, and how it can be a game-changer if they can't work and earn a paycheck. That may leave people susceptible to myths and falsehoods that may prevent them from getting the right disability insurance.
To set the record straight, TheStreet asked several financial services experts to cite their most problematic myths related to disability insurance.
Here's what they said:
1. Disability insurance is like workmen's comp: "My number one myth is that many people think disability insurance is just like worker's compensation," notes Mike Raines, owner of Raines Insurance Group in Atlanta. "This is not true. Worker's compensation pays benefits if an accident occurs while you are on the job. Individual disability coverage benefits do not have to be work related."
2. I'll never get disabled: "There's a myth out there where people say, 'I don't need this coverage because, I will never get disabled,'" says Benjamin Offit, a financial planner with Clear Path Advisory, Inc. in Pikesville, Md. "This is a common myth from many people, especially young people. They feel that they are invincible, and this won't happen to them, therefore they don't need the insurance. However, nobody chooses to become disabled, it just indiscriminately happens. The point of it is to protect your current and future earnings, and transferring that risk to the insurance company is far cheaper than retaining the risk."
3. Disability payments can't be taxed: "The most common disability insurance myth that I encounter is the prevailing thought that all disability payments are not taxable," states Christopher Jervis, an accountant with Lone Wolf Financial Services in Conyers, Ga. "While it is true that many types of disability insurance can be non-taxable, there is no 'across the board' exemption for disability."
Jervis says that worker's compensation, Social Security disability, and veteran disability payments are generally not taxable and not reported on the tax return. "Disability payments paid under a no-fault auto insurance policy are also generally excluded," he adds. "And, typically, policies purchased by an individual, on their own, with post-tax dollars are not going to be taxable."
Where the confusion comes about is for policies that are purchased as part of an employer sponsored group plan, he says. "If the disability premium was paid either in whole or in part by 'pre-tax' dollars, then the disability insurance that corresponds to the employer's percentage of premiums paid is taxable," Jervis says.
4. Disability is a result of accident or injury: "Many folks believe that the risk of disability lies within accidents or freak injuries and that disability simply won't happen to them," says Richard Reich, president of Intramark Insurance. "The truth is that the leading causes of disability are actually illnesses. Only 9% of long-term disability cases are caused by accidents. Cancer, diabetes and heart disease lead the pack in terms of causes of disability in the U.S."
5. Uncle Sam has your back if you're disabled: Social Security does not cover temporary disabilities; it only covers permanent medical conditions only, says Kevin Haney, owner of New York-based A.S.K. Benefit Solutions. "Plus, your state likely does not offer temporary disability," he says, noting that only five do: California, Hawaii, New Jersey, New York and Rhode Island. The New York benefit is laughably small at $170 per week, and may do more harm than good when consumers think they are covered.
Disability Insurance is no luxury; it's a necessity for U.S. working adults. So get the facts when you start looking for a policy of your own, and leave the myths to the storytellers.