Disability insurance: a financial priority

People suddenly disabled face increased risk of bankruptcy. An insurance policy can help.

Nancy Starnes recalls her motivation to recover after a private-plane accident in 1973 left her with no sensation below her hips.

"I knew my 5-year-old son and my husband needed me. I didn't accept that I couldn't recover. I was committed to gaining mobility and control over my life," says Ms. Starnes, now senior vice president of the National Organization on Disability.

Ms. Starnes was required to rely on a wheelchair. After nine months of difficult rehab, she returned to the brokerage firm where she had been training to be a trader. The firm encouraged her to return, staying in contact and assuring her that she would have a job when she was ready.

Since then, Starnes's has held position in local elected office, county disability associations, and, for the past 10 years, at national disability associations in Washington.

"One doesn't have to walk in order to work. Focus on how you can stay employed. The ability to work is a major component to recovery," she says.

Few readers may identify with Starnes, unable to forsee a future where disability affects their opportunities to work, care for themselves, or enjoy personal pursuits. Unfortunately, many experience a car accident, sport injury, or household fall that may cause short-term disability (defined as lasting less than 90 days), according to the Social Security Administration. .

"This is a community that anyone can join in an instant," reminds Mike Deland, president emeritus of the National Organization On Disability.

Craig Gray experienced this at age 24 when an auto accident left him a paraplegic. Mr. Gray was fortunate that his employer, K-Mart, where he was working as a sporting-goods manager, had a long-term disability policy that enabled him to acquire retraining as a computer programmer.

Gray's first job as a programmer in the disability-insurance industry eventually led to his current position as vice president in the "Return To Life" program at Prudential Insurance. He echoes Starnes's sentiment about recovery. "You need to regain a sense of yourself, retrain, and then return to work. A disability policy gives you the asset-base support needed in those transitional months."

A disability during your working years can leave you deprived of income and the ability to make major payments. Without disability support, a vicious cycle of financial reversals quickly occur. Except for those with a large amount of savings, people who suddenly become disabled are often unable to pay their mortgage, healthcare premiums, credit-card bills, auto loans, utilities, and any pension or college-savings contributions. Those who are disabled are more likely to experience personal bankruptcy and home foreclosure than those who are not.

The immediate goal in managing disability risk is to ensure income replacement and necessary career retraining in the event of a short or long-term disability. Since only 39 percent of Americans have enough savings to cover three months of living expenses, most need to implement a disability finance plan.

How do you achieve such protection?

1. Own health insurance. This is the foundational block of any personal-finance plan, providing coverage needed for all healthcare.

2. Obtain disability insurance. This should rank with life insurance as a secondary financial priority.

3. Check with your employer's benefits department to determine your short-and long-term disability coverage. If you work for a small employer or are self-employed, such policies are unlikely to be available.

4. If lacking short-term disability coverage, fill the gap through a six-month self-funded emergency savings account covering half of your annual budgeted expenses. If such an account is not feasible, consider purchasing a short-term disability policy.

5. Be rigorous in reviewing potential long-term disability policies. Such contracts have numerous options, so carefully check occupation, income, recovery, and cost-of-living clauses. Access disabilitybenefits101.org for an independent discussion of disability benefits.

6. Choose a long-term rather than short-term policy if your budget is limited. Long-term disabilities can create more expensive financial hardships.

7. Integrate Workers Compensation, if you are eligible, into short-term disability planning. If you qualify for long-term Social Security Disability, your private carrier will offset their replacement income payments against any other sources of support. Be wary of their restrictions on coverage and duration.

8. Review the financial strength of the insurance company before signing a short- or long-term policy. Check their ratings at ambest.com.

Dr. Kathleen Connell is a professor at Haas Graduate Business School, University of California, Berkeley.

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