A Financial Lesson from the Boston Bombings

... for anyone who could face long-term recovery from injury or illness.

It's a subject that is often poorly understood. But the aftermath of the Boston Marathon bombings that occurred a few months ago serves as a powerful reminder of your need for an adequate amount of disability insurance coverage.

The fact that those badly injured in Boston could face serious financial challenges as they cope with injuries that could be permanent emphasizes the need to discuss this topic.

A major injury that could diminish or halt your ability to produce an income could happen at any time, so it's best to be prepared.

About 70% of working people don't have disability insurance, according to the Bureau of Labor Statistics. And those who do may end up with smaller payments than they expected because benefits are usually tied to base pay; bonuses, overtime pay and commissions are excluded.

One reason many don't think about disability insurance or procrastinate in getting it is that they underestimate their chances of needing it. If you're in your 20s, you have a three-in- 10 chance of becoming disabled before retirement age, according to the Social Security Administration — and your risk rises as you age. And most disabilities aren’t caused by accidents or traumatic events like the Boston bombings but instead by common conditions and illnesses like a bad back or liver disease, says the Council for Disability Awareness.

More than 90% of large employers provide some form of long-term disability insurance, according to Aon Hewitt. And 32% provide additional coverage called "accidental death and dismemberment" coverage, which typically provides a onetime payment of $50,000 or a multiple of one year's salary for those who lose

Unfortunately, many workers don't understand what's included in their coverage and may discover too late that they don't have enough.

You may have been enrolled automatically in disability insurance when you joined your company, but some firms require you to contribute part of your earnings or offer you the option of increased coverage above a basic amount. Small employers are less likely to provide coverage, instead making it a voluntary benefit.

Under many disability policies, if you receive an injury that keeps you out of work for a few weeks or months, you'll probably qualify for short-term disability payments for three to six months. After that, if you still can't perform your job, you could be transferred to a long-term disability plan that provides payments for a set number of years or — with a very good policy — even until retirement.

Most employer-provided policies will replace about 60% of income, but you may be able to replace 75% or 80% of your salary through additional coverage. No insurer, however, will replace 100% of anyone's income — on grounds that it would eliminate your incentive to return to work.

If you're single with few responsibilities, the minimum disability coverage your job offers might seem like enough to help pay your bills until you recover or become trained for a different job.

If you're married, remember that if you can't work, your spouse may have to become your caretaker, impacting his or her work schedule or creating the need to hire outside help.

What about Social Security disability benefits? They’re usually smaller and hard to get and usually don't start until you're disabled for at least five months with expectations that your disability will last at least a year. And they're offered only to those who can't perform any job, not merely their own. Also, SS benefits may be reduced if you receive workers' compensation or disability benefits from another government program.

For all these reasons, while you're working and in good health, let us help you evaluate your need for disability insurance.

Originally published in Inside Personal Finance August 2013

More Insurance Advice