Your Clients Have Life Insurance, Do They Really Need Disability Insurance Too?
Thursday, September 8, 2016
For most financial advisors, there’s no question that life insurance and disability insurance are both important financial security measures for any working family. But despite professional opinion, you may hear your clients question the need for both types of insurance when money is tight and the ability to afford everyday necessities is strained. So, do they really need DI if they have life insurance?
When faced with this question you might start by asking one of your own: do your clients feel there is a greater risk that they will be disabled or will suffer untimely death before retirement?
Many of your clients may be surprised to find out that during the length of a typical career, disability is far more common than early death.
While nearly half of all American families have individual life insurance policies (44%), less than a third (29%) have disability insurance. But an American worker in their 20’s has a 25% chance of becoming disabled for some period during their career while an American male in his 20’s has a 1-in-6 chance of dying prematurely and an American female in her 20’s has a 1-in-9 chance of dying before reaching retirement.
Follow with a question about the most common causes of disability. Many people erroneously believe that disability is always, or nearly always, caused by an accident, which would exempt a huge portion of the workforce from the potential of disability. But in fact the most common causes of disability are illness and chronic conditions such as muscle or back pain, neither of which discriminate by industry.
Once your clients understand the true probability of becoming temporarily—or permanently—unable to work as a result of disability, ask them how they would manage financially for weeks, months, or even years without a paycheck.
Life insurance won’t pay out for disability. The only insurance that protects income is disability insurance. While policyholders with permanent life insurance can take loans from their policy’s cash value to pay for expenses in an emergency, it’s not the same as receiving benefits. For one thing, it could be years before a life insurance policy has enough cash value to be helpful. And more importantly, if the loan isn’t repaid, the benefits paid to your client’s family after death would be reduced.
Conversely, disability insurance benefits are paid out during periods when your client is unable to work—regardless of how long they have had the policy—and do not need to be repaid.
Clients that think they can rely on Worker’s compensation or Social Security payments would very likely be disappointed if the need for them arose. Worker’s compensation benefits only apply to injuries that occur on the job, and Social Security disability benefits are often very low and can be difficult to get.
Individual disability insurance policies don’t have to be cost prohibitive for any earner. You should be able to find a policy that adequately protects your client’s paycheck for as little 1.5 – 3% of their gross income.
If you have questions about DI myth busting, or need help fielding difficult questions from clients, give us a call. We are always happy to help you address common concerns and to help you find creative ways to encourage your clients to protect their paychecks.