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Understanding The 'Real Cost' Of Financial Decisions Takes Some Imagination
What is the real cost of a financial decision? Usually, it's not just the purchase price, especially if you view the question from an economic (rather than accounting) perspective. One aspect of counting the cost is considering the opportunity cost. Even though the calculations of opportunity cost are imaginary, making this hypothetical calculation often provides a better understanding of the real cost of financial transactions.
 Ask any insurance agent who's been in the business for awhile, and chances are he/she has heard this statement, or a variation of it. That's because disability is one financial topic where illusions often prevail over the facts.
For most non-retirees, their ability to earn an income is their greatest financial asset. Compensation from work puts food on the table, pays the mortgage, sends kids to college, and builds the retirement nest egg. Without an income, none of that happens. It should be easy to recognize the desirability of good risk management strategies for disability, right?
Wrong. Just like the findings in The Invisible Gorilla, people underestimate the risk of disability and overestimate the abilities and resources available to handle it. Consider these statistics:
- The government's Social Security Administration (SSA), which provides disability benefits for most Americans, says that three in 10 people entering the workforce today will become disabled before retiring.
- SSA also reports that the overall rate of disability is increasing among both men and women workers. In 1999, 3.6% of covered workers were receiving Social Security Disability Income payments, while in 2009, 5.1% were receiving SSDI payments. Factors behind this dramatic rise include the aging of the U.S. workforce and the recent poor economic conditions.
When 5% of Americans are on disability claim and 30% are likely to experience a period of disability before retirement, this sounds like a situation that should be addressed. And in some ways, it is: Social Security offers some insurance, as does Workers' Compensation, which provides benefits for disabilities occurring in the workplace. But do these programs really provide adequate risk management for disability? Again, look at the numbers:
- The Council for Disability Awareness (CDA), an association of 16 insurance companies that comprise 75% of the commercial disability insurance marketplace, reports that 95% of all CDA Member Company disability claims are not work-related. For the SSA, 90% of all disabilities are not work-related.
- 31.2% of individuals who received long-term disability benefits from CDA Member Companies in 2009 did not qualify for disability benefits from Social Security. While the number of workers receiving Social Security benefits has increased, only 35% of workers applying for SSDI disability claim payments in 2009 were approved; 10 years ago, the approval rate for workers applying for disability was 52%.
- In spite of the limited protection afforded by Social Security and Workers' Compensation, the US Bureau of Labor Statistics reported in an April 29, 2010 press release that 46% of full-time workers had short-term disability benefits and only 39% had signed up for long-term disability.
The conclusion: Many of the disabling incidents that could keep you from earning an income are not going to result in payments from either SSA or Worker's Compensation. And half of all workers don't have any other coverage. How does this happen?
"Many people recognize the emotional and financial impact of becoming disabled, but they tend to underestimate the consequences of not having adequate income protection," according to insurance company vice president Kevin Farley. Instead of insurance, they think they can rely on their savings, make adjustments in lifestyle, and get help from family members.
But mostly, people think they can define the terms of their disability. They will say...
"If that happened to me, I could still go to work." or... "I wouldn't be out that long. I'm a fast healer." and... "I'm not one of those people who would milk an insurance claim."
Hmmm. It sounds like these people are operating under some illusions. They minimize the impact of a disability, often because they underestimate the likelihood of it occurring while overestimating their ability to withstand the financial consequences.
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