By Gail MarksJarvis
NEW YORK (Reuters) - The odds are in your favor that you will not end up using the disability or term life insurance you get through work any time soon. But you need it anyway – and more than you typically get for free.
Despite insurance industry statistics that indicate that one in four 20-year-olds will be disabled before reaching retirement age, the averages are skewed by laborers with physically demanding jobs. Yes, people break arms and have bad backs, but those disabilities do not typically keep them out of a desk job for the three months that often must pass before disability insurance starts paying benefits.
Still, while the risk is low, people need to think about how they would pay their bills if they become unlucky. “You don’t want to lose your home or have to use your 401(k),” said John Ryan, principal of Ryan Insurance Strategy Group, and a certified financial planner who advises other financial planners on insurance.
If you are young and have no children or a spouse counting on your paycheck, you still need to think about what you would need to cover your mortgage or lease payments, your student loan debt and basic expenses.
Even in a two-career family, losing one income could hurt, said Sheryl Garrett, a certified financial planner and founder of Garrett Planning Network. If one spouse is working more to make up the difference, then who cooks, cleans, mows the lawn, and picks up the kids? “You might have to hire someone. And for a disabled person, a spouse might have to provide caregiving too, or hire a caregiver,” added Garrett.
Although the Society for Human Resource Management reports that 85 percent of large companies provide some life insurance for employees, free insurance often covers only a year of income. When an employee leaves a job, coverage likely ends. A rule of thumb for life insurance is to have seven to 10 times a person’s income to cover a family until children have been raised and debts paid off. Online calculators can help you figure out the math
Rather than buying extra insurance in the workplace, healthy people should compare prices in the private market because it is more comprehensive and typically less expensive. A parent of young children could lock in a 20-year-term life insurance policy that would provide $1 million and cost as little as $36 a month, according to Ryan’s calculator Also try LifeQuotes.com or AccuQuote.com.
By securing a term life policy for a lengthy period, a parent avoids having to reapply for insurance, face steep rate increases, and potentially get rejected for weaker health later in life.
On the other hand, disability insurance is best purchased through the workplace. It is much more expensive than life insurance if purchased privately. Ryan suggests buying all you can in the workplace.
Typically, when employers provide long-term disability insurance it covers 60 percent of an employee’s income. That can seem reassuring, but often there are also maximum limits – perhaps $2,500 to $5,000 in coverage a month. An average worker earning $75,000 or less might be fine under such rules, but not someone earning over $125,000, said Ryan. In addition, bonuses and commissions typically are not covered.
To show the contrast, Ryan offers this example: A recent workplace plan charged a 30-year-old $16.47 a month for each $1,000 of disability coverage per month. Yet, if purchased privately, a 30-year-old woman would pay $30.56 a month and a man $19.50 a month. The costs go up as you age, which can get pricey.
Years ago, Garrett thought a young client was making the mistake spending a ton of money on disability insurance. Although he looked ready to play basketball, the man contracted a debilitating genetic disease and just one year later was using a wheelchair and a walker, with no chance of recovery. In retrospect, his insurance purchase was well worth it, Garrett said.
(The opinions expressed here are those of the author, a columnist for Reuters.)