Brian Gruss Licensed Insurance Planner

Five Reasons Why Most People Refuse to Buy Disability Insurance

Everyone has their reasons for not buying disability income (DI) insurance. Below are five of the most common. But do you know the facts?

Reason 1: I can always get coverage in the future.

Fact: True, but people usually develop health problems as they grow older, and premiums increase with age.

Reason 2: My family and friends will support me. Or I will pay my bills with savings.

Fact: While your family and friends would love to help you, are they in a financial position to do so? And do you really want to be a burden on someone else? And, unless you’re independently wealthy your savings probably will not last long. Just one year of disability could easily wipe out several years of hard-earned savings.

Reason 3: I have group disability coverage through my job.

Fact: Even if your employer is among the few that’s not cutting back on benefits, group disability insurance typically covers just 60% of gross income, and benefits are usually fully taxable. Can you afford more than a 40% pay cut? Also, what happens if you change jobs?

Reason 4: I cannot afford it. I’ll purchase a policy later when I have the money.

Fact: The average premium is typically only 1 to 3% of your gross earnings. Plus, the longer you wait, the higher your premiums will be. If you cannot afford 1 to 3% of earnings, how will you afford to pay your bills in the event of a disability?

Reason 5: It’ll never happen to me.

Fact: If you’re under age 35, chances are one in three that you will be disabled for at least six months during the course of your career.¹ Also, consider that more and more people are living with disabilities today that would’ve killed them in years past.

Your ability to work and earn an income is by far your largest asset. Consider the benefits of a disability income policy to help protect your earned income should a sickness or injury force you out of work.

¹ 1985 Commissioners’ Individual Disability A Table, Society of Actuaries

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Appreciating the Value of Life Insurance

Whenever someone passes away there is usually an associated financial loss. Such loss could be the primary income for a family or the replacement value of someone responsible for the care of a child or disabled parent. It could also be a business executive in charge of sales or an employee who managed the operation when senior management was absent.

This potential financial loss is often referred to as a person’s human life value. The value itself is calculated based on the future loss of an income stream, the future cost of replacement, or the immediate impact to a company while it attempts to replace the key employee.

For most families, the potential loss of income is the primary reason to buy life insurance. Losing the paycheck of a working spouse will leave most families in a tenuous situation. Their normal lifestyle becomes vulnerable on a reduced income.

In years past, the primary breadwinner was usually the father. The mother tended to the house, while the father headed to the office. Mom was there to welcome the kids home from school and Dad brought home the paycheck. Times have changed and today women participate equally in the workforce. Despite what continues to be an income discrepancy between the sexes, the money Mom earns is essential to the financial well being of the family.

Additionally, it is no secret that consumer debt in the U.S. is on the rise. Government data shows that Americans literally have a negative savings rate (i.e. we spend more than we earn). As such, any reduction in take home pay can potentially devastate literally hundreds of thousands of families. While this scenario is harsh enough while both parties are alive and well, the reality of what happens at the death of either breadwinner is frightening.

Because of these reasons, life insurance continues to play an important role in any financial plan. In fact, it should be the primary asset for families that stand to experience severe lifestyle disruptions should a spouse pass away. Unfortunately, the value of life insurance is frequently misunderstood by those who need it the most.

There are many variations of life insurance products to consider, but that’s a topic for another day. The important message here relates to the extraordinary value of life insurance itself, not any particular policy type.

Indeed, there are very few, if any, recipients of a death claim who have asked their insurance agent about the type of coverage. The fact is the tax-free death benefit provided a welcomed amount of cash at precisely the time when money was needed the most.

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Finding the Middle Ground with Return of Premium Term Insurance

Anyone who has ever shopped for life insurance has faced the difficult task of choosing between a term and permanent policy. The choice isn’t as clear-cut as it may seem: while term insurance may be less costly in the short run, permanent insurance features an attractive cash benefit. Not surprisingly, having to choose between these two types of coverages intimidates many prospective policyholders. In fact, some consumers are so baffled by this decision that they don’t purchase any coverage.

Fortunately, there is a new type of coverage for those consumers who just can’t decide what policy to buy. Return of premium term insurance (ROP) is a hybrid product that provides term coverage with a twist: policyholders get all of their paid premiums back if they are still alive at the end of the term.

To understand how ROP combines the best traits of term and permanent insurance, lets compare them side-by-side. If you purchase term insurance, you pay a set premium for a fixed term, usually between ten and thirty years. Term rates are low, especially if you are young and healthy. However, your money only buys you a death benefit: if you are still alive at the end of the term, you receive nothing.

Permanent insurance, on the other hand, provides the same death benefit protection, but also allows you to build cash value within your policy. This balance is handy if you need money for emergencies, college tuition, etc. The downside is that you can expect to pay for this benefit through significantly higher premiums.

ROP gives the consumer the best of both worlds by providing the protection of insurance along with the savings component. With such a policy, if you die, your beneficiary receives a lump sum death benefit. But if you live through the term, the insurance company returns all of your premiums. While ROP is an appealing choice for all kinds of individuals, it is especially useful for purchasers who need to fill a temporary need, such as:

-Insurance coverage for a key employee

-Individuals who are planning to refinance their homes

-Divorcees who are required to purchase insurance as part of their divorce decree

While ROP has many advantages, consumers should keep in mind that the cost of this coverage is somewhat higher than a typical term policy. And if you need to extend your policy past the initial term period, expect to pay significantly higher rates. The best strategy is to examine all options, carefully weigh the costs and benefits of each, and pick the one that can do the most for you.

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