PRINT - Chapter 1
Introduction to Disability Income Insurance


The important points addressed in this lesson are:

The chances of an individual becoming disabled are more likely at most ages than his or her chance of death

The principal factors that affect the probability of becoming disabled include the insured's health status, age, occupation and lifestyle

The likelihood of a disability occurring in a group of individuals is much greater than the probability of any individual's become disabled

The sources available to provide an income during an individual's disability are generally limited to savings, a spouse's employment, borrowing or disability income insurance

Although the general level of savings in the United States is far less, if an individual saved 10% of income each year, one year of disability would wipe out almost 10 years of savings

Spousal employment is not usually a viable source of sufficient family income during a period of disability for several reasons, including the likelihood that both spouses are employed just to meet existing expenses

A spouse that is not currently employed outside the home is unlikely to be a source of sufficient income in the event of the other spouse's disability due to technological advances that may have rendered his or her skills obsolete

Disability income insurance is the most economical and desirable form of income replacement during disability since the annual cost of each dollar of benefit is normally no more than 4 - 5¢




Likelihood of Disability

When we talk about disability as that term relates to the disability income products we sell, we need to realize that it has a specific meaning within the context of the coverage.  It means meeting a specific definition in a particular policy -- and those definitions can be and are quite different from each other.  

The impact of those differing definitions is that a policyholder may be considered disabled or not depending upon the disability income policy under which he or she is insured. We will explore the variation in those important definitions and their consequences for insureds in our next lesson.  For now, however, let's look at disability from a less legalistic perspective and consider disability in more human terms.  

When our prospects consider what it means to be disabled, their frame of reference may be quite a lot different.   They seldom think of disability in terms of their meeting -- or failing to meet -- a particular definition.  Instead, they think in terms of an illness or injury that causes them to lose their income.  Their mortgage or rent payments continue to be due and their children still need to be fed, but their income to make those payments has stopped.

But, just how likely is it that any individual will be disabled according to our more-human definition?  The answer may startle you.  At most ages, statistics tell us, the probability of disability occurring is from 2½ to 4 times more likely than that death will occur at that age!  

Let's consider the likelihood of disability from a somewhat more "scientific" perspective and look at a Probability of Disability table developed from the 1985 Commissioners Disability Table.  What the table tells us is what the chances are that anyone will become disabled during their working years.  

By looking at the table, we can see that a 40 year-old has a 31% chance of becoming disabled and suffer a disability that will last at least 90 days during his or her normal working life.  



PROBABILITY OF DISABILITY*
(Probability of Disability Lasting 90 Days or More)
Present Age
Over Duration of Years
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


While that information is interesting, it is a little difficult to really understand its impact unless we extrapolate it to a group of individuals.  By applying that percentage to a group, it can give us some startling insights.  

Since the likelihood of disability occurring before age 65 to someone age 40 is 31%, the table is telling us that there is an approximately 3 in 10 chance of becoming disabled if you are 40 years old.  In a group of 10 individuals, all of whom are age 40, the statistic tells us that 3 out of that group will be disabled in the next 25 years -- and the disability will continue for a period of at least three months. The statistics are very sobering when we view the prospect of disability in this way.

An individual's general health plays a large role in whether or not anyone becomes disabled.  In addition to an applicant's current health, however, the likelihood of his or her disability is significantly affected by 3 factors:

Age
Occupation
Lifestyle


Age

You may have noticed on the table we just looked at that, contrary to conventional wisdom, the likelihood of disability seemed to be declining as the individual aged. That isn't the case, however.  Although we noted that the probability of disability occurring before age 65 declined as the age increased, that was due principally to the shortening of the period being considered.  While the period considered was 40 years when the individual was age 25, it diminished to only 20 years at age 45.  

Not unexpectedly, the probability of disability actually increases as the individual ages.


Occupation

It should be clear that an individual's occupation plays a major role in whether or not he or she will become disabled.  Although we will consider this at much greater length when we discuss the definitions of disability, simple intuition would suggest that a bricklayer is normally exposed to more disability-causing hazards in his or her daily duties than an attorney.  

When we look at this more closely, later in this course, we will see that this greater likelihood of disability resulting from occupation has an important bearing on both the cost of the coverage and its quality.


Lifestyle

The third principal factor in any individual's chances of becoming disabled is lifestyle.  When we think of "lifestyle," we need to think of the applicant's smoking and drinking habits as well as his or her avocations.  

While smoking and excessive drinking of alcohol have a well-known connection to the chance of disability, your client's new mountain-climbing hobby may also play a role.


Groups

Earlier, we saw that the likelihood of disability during an individual's working years is significant.  It may be 4 times as likely as death at some ages.  But what about the probability of disability when we consider a group of individuals, rather than a single person?  

It should be expected that the probability of one disability occurring increases dramatically when we switch our focus from the individual to a group.  Consider the Probability of Disability occurring in a group of men.


PROBABILITY OF DISABILITY*
(Probability of One Long Term Disability Occurring in a Group of Men)
Age
Number Of Members In The Group
2
3
4
5
6
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.


What the group chart tells us is that the likelihood of a single disability increases significantly when we consider a group.  As the group size increases, the probability approaches 100%.  This statistic alone can demonstrate dramatically to the business executive the need to provide a sick pay plan -- a coverage form that we will discuss later in our course.


Sources of Disability Income

Now that we have considered the probability of disability, let's examine the traditional sources of income that our client may have available.  For most people, the sources generally available to provide an income during their disability are:

Savings
Spouse's Employment
Borrowing
Disability Income Insurance

Let's briefly consider each of these potential sources.


Savings

When we examine existing savings as a source of disability income, we need to realize that the tradition of saving is not one that has generally taken root in this country.  The U.S. personal savings rate is among the lowest in the industrialized world.  At a savings rate of barely 4% a year, the U.S. has fallen well behind many other nations.    

Furthermore, when Americans save money, it is generally to be able to purchase a particular consumer item.  It may be a down payment for a house or a car.  It may involve the desire for a new television set, a vacation or some other consumable.  

Even if our prospect has existing savings we need to ask ourselves and our prospect whether he or she can be sure the savings will be sufficient -- without knowing how long a disability might last.  And, would the prospect be willing to wipe out those savings to provide income during disability.  

Remember, even if someone saved 10% of his or her income each year, one year of disability can wipe out as much as 10 years of savings!


Spousal Employment

But, even if using existing savings is an unlikely option for most people, what about a spouse's returning to the job market.  For many families, this option is as unproductive as using existing savings.  In fact, the likelihood of an unemployed spouse returning to the workplace was once far greater than it is today.  We are faced with several, relatively recent, phenomena:

Dual income families
Workforce contraction
Technological innovation

The nuclear family of a bygone era is just that -- bygone.  The family consisting of a working husband, a school-age child and a stay-at-home mom has generally ceased to exist on any broad scale.  Most families today are two-income families, and those families depend upon both incomes to meet their basic monthly bills.  In many cases there is no unemployed spouse to return to the job market.  

Furthermore, we have seen a decline in the number of unskilled and semi-skilled jobs as many companies and industries reduce their workforce.  We can refer to this phenomenon as "downsizing." "rightsizing" or by some other euphemism.  What it means is that the market for many skills has changed and, in many cases, contracted or disappeared.

Finally, prolonged absence from the job market may mean that important technological advances have occurred with which the spouse is unfamiliar, further worsening the possible chances of employment in a previous occupation.  If a spouse is not currently employed outside the home, it is extremely unlikely that appropriate employment is readily available.

In the unlikely event that a spouse can find a job to help support the family during a period of the breadwinner's disability, can she really be expected to take over the job of breadwinner and still function as a parent, a spouse and a part-time nurse?


Borrowing

Borrowing to pay bills during disability may be the biggest financial disaster of all.  While borrowing from the usual sources, i.e. from banks may not be available because of the lack of employment resulting from the disability, many people may be able to borrow from existing credit cards.  At the 15% to 22% interest rates charged by these credit sources, it is usually not very long before a bad financial problem becomes a catastrophic one.

Without a current income source, borrowing may be difficult or impossible.  However, even if borrowing is an option -- from credit cards, for example -- it is an expensive option.  At some point, someone must repay the loan principal plus interest.


Disability Insurance

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 annual premiums that often are as low as 4 or 5 cents for each dollar of monthly benefit provided, disability income insurance offers the only reasonable alternative.

Disability income coverage provides income exactly when it is needed -- when disability strikes.  And, it changes the possible financial catastrophe of disability to a reasonable and budgetable monthly premium.


Summary

For many people, disability is the forgotten hazard -- despite its being far more likely at most ages before retirement than death.  Although the chances of becoming disabled are greater for someone with a history of health problems, age, occupation and lifestyle also impact the likelihood of disability.  If the disability statistics for any individual are sobering, the same statistics when applied to a group of individuals are even more so.  As the size of any group increases, the likelihood of a long-term disability among members of the group also increases.  As the group size becomes larger, the chance of a disability becomes almost 100%.  

After considering the alternative income sources during disability -- savings, borrowing or spousal employment -- the only obvious answer is disability income insurance.