7 truths about disability insurance

What’s your most valuable asset? You may say your home, your retirement fund or even your car. Or perhaps you’d say family, friends or health. You wouldn’t be wrong. However, we often overlook one essential asset—you and your ability to earn an income and take care of your family.

In 2015, Chad and Rebecca Wurgler were reviewing their assets as she was preparing to go back to school for nursing. This meant that for a period of time Chad would be the sole provider for his family, which includes two children, one with complex medical needs.

“You never know what’s going to happen—that was always in the back of our heads,” Chad says. “What if we’re not here; what are some things we can do to protect our family?”

The Wurglers, who live in Minneapolis, met with Eric Werlinger, their Thrivent financial advisor who also is Rebecca’s brother, to assess their current financial position, income/asset protection and health protection. Specifically, with the loss of Rebecca’s income, they talked about making sure they’d have income if something happened that would keep Chad from being able to earn a paycheck. Chad knew he had disability insurance through work but acknowledges he really hadn’t paid attention to what it included. Or that it might not be enough.

The couple decided to purchase a personal disability insurance policy that would cover the gap between what his policy through work would pay and his regular paycheck. “Even though we never thought we’d have to use it, we knew we needed that protection,” Chad says.

In the summer of 2018, right before his 45th birthday, Chad was diagnosed with cancer. While he wasn’t out of work full-time, Chad missed enough time at work due to treatments and follow-up procedures that his disability insurance policy helped keep most of his paycheck coming in.

“The payments were impactful and definitely helped with our expenses,” says Chad, who has recovered from his cancer but still has health issues stemming from the initial diagnosis. “And we don’t know the future. I may need to use it more than I already have.”

Often the word “disability” conjures up pictures of a catastrophic, permanent injury, says Don Campfield, who has disability insurance expertise as an external wholesaler in Thrivent’s Health Center of Excellence. However, more often, he says, it’s injury or illness—similar to what the Wurglers experienced—that can keep you out of work for a period of time, potentially impacting your finances.

A 2019 study of consumer bankruptcy filings found that 77.8% of debtors cited income loss as a contributor to their bankruptcy, Campfield says. This included 44.3% specifically citing medically related work loss as a contributor.¹

“Having income protection when and if something happens can allow you to rebuild and reclaim your life,” Campfield says.

Consider the following seven truths about protecting your income.

No matter how young and healthy you are today, you’re still vulnerable to disability. A majority of claims for long-term disability income are not accidents; they’re caused by unexpected illnesses.²

And one in four of today’s 20-year-olds can expect to be disabled and out of work for at least a year before they retire.³

“Tomorrow you could end up with cancer, a heart attack, a stroke, mental health issues,” Campfield says. “These things may not permanently disable you, but they can keep you from work for months or even years and set you back financially if you’re not prepared.”

Any one of these things also could make you unable to get disability insurance coverage or be excluded from coverage in the future, he says.

Group coverage through your employer can be great, says Chad Masche, market developer in Thrivent’s West Advisor Group in Arlington, Washington. Someone else usually is paying for it, and generally you didn’t have to do anything to get it.

“On average, your group disability insurance policy may cover up to 60% of your gross income if something should happen to you,” Masche says. But, because your employer is paying for the policy, the benefits are typically taxable, so you’re bringing home even less.

“What would have to change,” he asks, “if you were only bringing home potentially half your paycheck?”

A supplemental disability insurance policy can wrap around your work policy, if you have one, or stand on its own, providing as much benefit as you have made provision for in your contract.

“Every bit of your income goes toward financial goals, whether it’s saving or spending,” Masche says. “It’s for the things you need, want and wish for. So, to make sure these items are not disrupted if you can’t work due to illness or injury, you’d want to have your paycheck protected with as much disability income insurance as you are eligible for.

“In the end, it can put you in the position where you can do what you want versus what you have to do.”

There are several factors that play into the cost, including benefit amount, health status, occupation, age and how long you choose to wait before benefits kick in. But on average, you can expect the cost for a supplemental disability insurance policy to be 1% to 3% of your annual salary.⁴

“Many things in your budget—cable or takeout, for example—are often more than 1% of your income,” Masche says. “This is protecting your income, the money that’s buying many things in your budget, often including funding your retirement account.”

You can work with your financial advisor to structure the policy that works best for you and your budget. Also, the younger and healthier you are, he says, the easier it can be to qualify for a contract and a lower premium.

People often think they’ll have fewer expenses if disabled at home—perhaps less driving or not buying lunch every day at work, says Werlinger, Thrivent financial advisor in Glencoe, Minnesota.

“Those may be truths for a period of time, but there also may be more medical appointments, increased health costs, perhaps modifications to their home, etc.,” he says. “And expenses like a mortgage, car payment and groceries don’t go away.”

Don’t forget the long-term goals you’re saving for, such as retirement or college, he says. “We all have goals. No matter how big or small they are, they often are primarily fed with income.”

You may have other resources to draw on if you’re injured or ill and unable to work, Campfield says. But how long will those resources last?

“You likely have another purpose you saved those resources for,” he says. “Maybe it’s your retirement savings or a college fund for your children. You want that money there when you need it.”

If it’s your emergency fund you’d tap into, what will you do if an appliance breaks down or the car needs new tires? How will you replenish that fund?

In reality, only 40% of U.S. households have enough in liquid savings to cover at least three months of their recurring expenses, and only 28% can cover at least six months.⁵

If you’ve always had a two-income household, losing one of those incomes could be devastating.

“If you could come up with a strategy using insurance, if you could take the risk off the table for 1% to 3% of your income,” Campfield asks, “wouldn’t that be a better solution?”

Many people believe you can just sign up for Social Security disability insurance if something happens.

“What you may not know or understand is how difficult it may be to qualify for it,” Werlinger says. “It can be a very long process, and challenging.”

The Social Security Administration denies many disability insurance claims at first, and it could take several months for an initial decision. It could take a couple of years to get through the appeals process. From 2009 to 2018, only about one in three applications (32%) were approved; initial claim approval averaged 21%.⁶

“Any stay-at-home spouse is worth as much as the person leaving the house to go to work,” Masche says.

It’s estimated that the annual salary for all the jobs a stay-at-home spouse performs would be more than $178,000.⁷ You may not think about the costs associated with day-to-day management of the household or caring for children. But if the person providing them can’t, due to illness or injury, the healthy working spouse needs to find a way to accommodate the family. You’ll either lose income if the healthy spouse stays home or there will be a cost to hire someone to fill in.

Thrivent is one of a few insurers that offers stay-at-home spouse coverage to help pay for childcare, housekeeping and other responsibilities.⁸

For Werlinger, protecting income with disability insurance should be an important consideration of a person’s financial house.

“We buy a car, and we make sure it’s insured. We remodel our home, and we make sure the value is correct with our home insurer,” Werlinger says. “But we don’t always think about what our life is worth, which is life insurance. And we also don’t think about our ability to go to work every day, which feeds many of our financial goals. This is disability insurance.

“We all like to believe that nothing’s going to happen. And hopefully it doesn’t. But if you’re going to insure all these other things, why not the income that pays for them?”

Talk to your financial advisor to find out how disability insurance fits in to your financial strategy.