Key Points in This Chapter
Likelihood of Disability
When we talk about disability as it relates to disability income products, we need to realize that it has a specific meaning within the context of coverage — it means meeting a specific definition in a particular policy. Those definitions can be quite different from each other, and a policyholder may be considered disabled or not depending upon the policy under which he or she is insured.
When prospects consider disability, their frame of reference is usually simpler. They think in terms of an illness or injury that causes them to lose their income — while mortgage payments continue to be due and children still need to be fed.
Just how likely is disability? At most ages, statistics tell us the probability of disability is 2½ to 4 times more likely than death at that age.
The following table, developed from the 1985 Commissioners Disability Table, shows the probability that an individual will become disabled for at least 90 days during their working life:
| Present Age | Duration (Years to Age 65) | Probability of Disability |
|---|---|---|
| 25 | 40 | 37% |
| 30 | 35 | 36% |
| 35 | 30 | 34% |
| 40 | 25 | 31% |
| 45 | 20 | 28% |
| 50 | 15 | 25% |
| 55 | 10 | 20% |
| *Developed from the 1985 Commissioners Disability Table (lasting 90 days or more) | ||
A 40-year-old has a 31% chance of becoming disabled for at least 90 days during the next 25 years — roughly 3 in 10 individuals in any group of that age.
Although the table shows declining probability as age increases, that is because the period being considered shortens. The probability of disability in any given year actually increases as the individual ages.
An individual’s occupation plays a major role in disability risk. A bricklayer is exposed to far more disability-causing hazards than an attorney. As we will see, this greater likelihood of disability has an important bearing on both the cost and quality of coverage available.
Smoking and excessive alcohol consumption have well-known connections to disability risk. Avocations — such as mountain climbing or other high-risk hobbies — also play a role in underwriting decisions.
The probability that at least one disability will occur increases dramatically when we consider a group rather than a single individual. The following table shows the probability of at least one long-term disability occurring in a group of men:
| Age | 2 Members | 3 Members | 4 Members | 5 Members | 6 Members |
|---|---|---|---|---|---|
| 25 | 36.5% | 49.4% | 59.7% | 67.8% | 74.4% |
| 30 | 35.4% | 48.0% | 58.2% | 66.4% | 73.0% |
| 35 | 34.2% | 46.7% | 56.7% | 64.9% | 71.5% |
| 40 | 32.9% | 45.1% | 55.0% | 63.2% | 69.8% |
| 45 | 31.1% | 42.8% | 52.5% | 60.6% | 67.3% |
| 50 | 28.3% | 39.2% | 48.5% | 56.4% | 63.1% |
| 55 | 23.4% | 33.0% | 41.4% | 48.7% | 55.1% |
| *Calculated from the Society of Actuaries' DTS Experience Table | |||||
As the group size increases, the probability of at least one disability approaches 100%. This statistic alone can powerfully demonstrate to a business executive the need for a group sick pay plan.
Sources of Disability Income
For most people, the sources available to provide income during disability are:
- Savings
- Spouse’s employment
- Borrowing
- Disability income insurance
The U.S. personal savings rate is historically low and has long ranked among the lowest in the industrialized world. Even when savings rates rise temporarily, they rarely reflect disciplined long-term saving — most Americans save reactively rather than consistently, and relatively few maintain reserves sufficient to sustain a prolonged disability.
Even if someone saved 10% of income each year, one year of disability can wipe out as much as 10 years of savings.
For many families, this option is as unproductive as relying on savings. Several phenomena have made spousal employment an increasingly unlikely fallback:
- Dual-income families — Most families today depend on both incomes to meet basic monthly expenses. There is often no unemployed spouse to return to the job market.
- Workforce contraction — Many companies have reduced their workforce, shrinking the market for unskilled and semi-skilled jobs.
- Technological innovation — Prolonged absence from the job market may mean a spouse’s skills have been rendered obsolete by technological advances.
Even in the unlikely event that a spouse can find employment during a breadwinner’s disability, can that spouse realistically function simultaneously as breadwinner, parent, and part-time caregiver?
Borrowing to pay bills during disability may be the biggest financial disaster of all. Without a current income source, conventional borrowing from banks may not be available. Credit cards may be an option, but at interest rates that commonly exceed 20% to 27% — and often higher for those with less-than-perfect credit — it is usually not very long before a bad financial problem becomes a catastrophic one. At some point, the loan principal plus interest must be repaid.
Once you have discussed these three choices, it should be clear to any insurable prospect that the only sensible alternative is disability income insurance. At premiums that represent only a small fraction of the monthly benefit they provide, disability income insurance offers the only reasonable alternative.
Disability income coverage provides income exactly when it is needed — when disability strikes. And it converts the possible financial catastrophe of disability into a reasonable, budgetable monthly premium.
Summary
For many people, disability is the forgotten hazard — despite being far more likely at most pre-retirement ages than death. Although health history matters, age, occupation, and lifestyle also shape the probability of disability significantly.
When disability statistics are applied to a group rather than an individual, they become even more compelling. As group size increases, the likelihood of at least one long-term disability among members approaches certainty.
After considering the alternative income sources during disability — savings, borrowing, or spousal employment — the only clear answer is disability income insurance.