The financial challenges of disability
Understanding the challenges of disability can help you prepare a plan should something ever happen to you or a family member.
Most people never anticipate becoming disabled. But today's 20-year-olds have a 1-in-4 chance of missing at least a year of work due to disability before they reach retirement age, according to the Council for Disability Awareness. Disability and family finances are inherently intertwined.
The causes of disability are as diverse as its duration: short-term for an injury that requires a hospital stay, for example, or long-term for recovery from an accident or debilitating illness. Whatever the cause or length, a disability has the potential to negatively impact the finances of any family. Here's what you need to know about the financial impact of disabilities — and what you can do to protect yourself.
The challenge: Loss of income outpaces short-term savings.
The stats: In an average year, 5.6 percent of Americans will experience a short-term disability of six months or less. Almost all of these disabilities are non-occupational in origin. Most Americans are nowhere near prepared to face a year without paychecks. According to a study by the Federal Reserve, 44 percent of U.S. adults couldn't cover an emergency expense of just $400 without going into debt or selling off possessions.
The remedy: Many financial experts recommend having an emergency fund that will cover three to six months of expenses — a recommendation specifically meant to address situations such as a medical emergency or a layoff that will put you out of work for an extended period of time. This can sound like a daunting amount, but the recommendation is for several months of living expenses, not income. If you could cut an expense (for example, vacations) while you're out of work, you don't need to include it in your emergency fund estimate.
The challenge: Your income and savings can't keep pace with unexpected medical bills.
The stats: One study of consumer bankruptcy filings identified medical bills and illness or injury as two of the primary causes of bankruptcy. That same study found that cancer patients were more than twice as likely to go bankrupt as people without cancer.
The remedy: If you're not financially prepared for an unexpected disability, it can cause more than just a financial "rough patch."After you've established your emergency fund, continue to add to it so that you have a robust financial backup.
The challenge: Disability can last longer, leaving your long-term financial outlook uncertain.
The stats: Even a successful Social Security Disability Insurance claim can mean a long stretch without income, as claims generally take three to five months to be approved. (And the average annual benefit is just over $14,000 — well below the poverty line for a two-person household.) At least 51 million working American adults lack any disability insurance other than Social Security coverage.
The remedy: Many people are covered by workers' compensation insurance, which covers medical care, costs for retraining, compensation for permanent injuries and replacement income (usually two-thirds of the worker's average wage, up to a fixed maximum benefit). But "workers comp"only covers people who are injured or disabled in connection with their job. An individual disability policy may offer help to bridge the gap.
Some employers offer workers the option to purchase group disability coverage, and they may subsidize the coverage with no underwriting required. If your employer doesn't provide this option, you can protect yourself by purchasing disability insurance on your own. Short-term coverage will provide money to help with monthly debt obligations like car loans and mortgage payments, while long-term coverage will replace a portion of your income in the case of a longer disability-related layoff from work.