Running the Risk of Long-Term Disability
by Allen Checkoway
The risk of long-term disability is increasing. A two-decade study reported in Health and Society (1984) revealed a 32 percent reduction in mortality from heart disease and hypertension, cerebrovascular diseases and diabetes--the four leading causes of death. But the morbidity (disability) risk increased 55 percent over the same time frame.
It's important to understand the disability signs of the times. Certain negative trends are affecting insurers and their management of risk. Between the ages of 35 and 65, three out of 10 working people are disabled for 90 days or longer. Nearly one in five people will become disabled for five years or more years or more prior to age 65. "New" causes of disability are complex and difficult to manage. Carpal tunnel syndrome, chronic fatigue syndrome, Epstein Barr and AIDS have become significant influences in disability claims management. A study conducted by a major disability insurer found that 10 percent of their new claims came from some form of psychiatric disorder. Moreover, nearly half of their long-term disability claims are caused by a psychiatric disorder.
The same study identified a dramatic increase in certain disabilities (psychiatric conditions, severe back pain, AIDS, carpal tunnel syndrome and Epstein Barr syndrome) over a four-year period.
Over the past two decades, improvements in medical technology have prolonged lives dramatically. Heart bypass surgery, angioplasty, transplant surgery and many modern forms of cancer treatment didn't exist 20 years ago. Though people with illness are living longer, they're living longer disabled lives.
The risk of disability is greater than the risk of death at all ages between 20 and 65. We buy life insurance because death is inevitable, but disability is only a possibility. If an employer doesn't offer group LTD automatically, their employees will not be likely to buy individual coverage. In the time it took to read this far, three people died and two of them had sufficient life insurance to cover their needs; approximately 104 people became disabled and 76 of them have no disability coverage.
Prefunding Long Term Disability Today
Individual disability premiums are calculated based on age and occupation at the time the policy is issued. The most economical time to purchase coverage is when we're young and in good health, though the probability of total disability exists at all ages.
Let's assume, for example, that a 30-year-old executive is earning $60,000 per year and is eligible for $3,000 a month disability coverage. He decides to defer the purchase of DI insurance. What's the cost of delaying a DI program until later, say until age 45?
At age 30, he would have only been spending $830 a year until age 65 (with $29,050 total premiums to age 65). Waiting until age 45 to begin coverage, the cost would be $1,460 a year for 20 years to age 65, or $29,020 in total premiums.
There is virtually no difference in total cost to age 65, whether starting a DI program at age 30 or 45. (Note: These calculations do not take into account the time value of money.) But there is an immense difference in total potential benefits. Had the 30-year-old become disabled the month after purchasing coverage, he would have received $3,000 per month for 35 years, or $1.26 million in total benefits by age 65.
Starting a program at age 45, total benefits to age 65 would be only $720,000, or $540,000 less than if coverage had started 15 years earlier.
What else is he gambling by waiting until age 45? Isn't it also predictable that DI policies in the future will be less liberal than those offered today? What's the likelihood he'll still be medically insurable at age 50? If he's uninsurable, these illustrations won't matter.
What if he develops a herniated disc in his back between age 30 and 45? If he can purchase DI, his contract will have a back exclusion É and no coverage for one of the leading causes of long-term disability. Plus, he'd be spending more money for fewer potential benefits, with no benefits whatsoever for a recurrence of his back problem.
Furthermore, the chances of recovery from a long term disability diminish as we get older. Note that for a total disability occurring at age 35 and lasting one year, 9 percent will be disabled at the end of five more years. When disability occurs at age 55, however, 20 percent will still be disabled at the end of the next five-year period. Although the chances of a total disability reduce with age, the chances of recovering from that disability diminish dramatically at the older ages.
To summarize, the total premium cost to age 65 is the same, whether starting at age 30 or 45. Starting at age 30 provides guaranteed coverage for 15 more years. $3,000 per month individual disability coverage provides $540,000 more potential benefits when starting 15 years sooner. Starting at age 30 "locks in" today's low rates on a guaranteed basis to age 65.
Today's good health guarantees restriction-free coverage versus running the risk of having future medical conditions excluded from coverage. The hazard of long-term disability at any age is too significant to be ignored. Delaying the purchase of disability insurance must be avoided at all costs.