Financial Steps to Prepare for Disability

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Most financial experts advise to have at least six months of income in a rainy-day fund in case of an emergency or job loss. But even that isn't enough for someone unable to return to work due to a serious disability or illness, according to Allsup, a nationwide provider of Social Security disability representation and Medicare plan selection services.

A 20-year-old worker has about a three in 10 chance of suffering a disability before reaching retirement age, according to the Social Security Administration (SSA). More than 8.57 million people rely on Social Security Disability Insurance (SSDI) benefits because they are unable to work. However, the average monthly benefit was just $1,072, and the average time to be approved benefits for those appealing to the Appeals Council was more than two years in 2011.

"Many people underestimate the financial severity of a disability," said Paul Gada, personal financial planning director for the Allsup Disability Life Planning Center. "With little savings of their own, they have to rely on others for support."

The Allsup Disability Finance poll for 2012 found that friends and family continued to be the leading resource for support while awaiting SSDI benefits. An Allsup Disability poll in 2010 was conducted on the same topic. However, 2012 poll results indicate that friends and family, along with credit options and charitable assistance, may be tapped out - forcing more people to sell personal items or raid their retirement savings.

Resources Tapped while Awaiting SSDI Benefits (June 2010 / April 2012)

  • Friends or family providing support (42% / 37%)
  • Spouse's income (33% / 34%)
  • Government assistance (such as Supplemental Security Income or food assistance) (33% / 33%)
  • Sale of personal items (26% / 31%)
  • Personal savings (20% / 21%)
  • 401(k), IRA or other retirement savings (15% / 18%)
  • Credit cards (17% / 15%) Home equity line of credit (7% / 4%)
  • Private charitable assistance (10% / 3%)

Planning and Preparing For Disability

It's important for people to plan financially for a disability while they are still working, Gada said. This should include:

  • Consider long-term disability (LTD) coverage. "If your employer offers long-term disability coverage, consider enrolling," Gada advised. While many employers have been cutting back on benefits, 32 percent of private industry workers have access to LTD coverage, according to the U.S. Bureau of Labor Statistics. These policies often are subsidized by employees and generally replace 50 percent or more of a worker's salary. Length of coverage, extent of disability and other factors can vary widely, so it's important to understand the policy details. Individuals also can purchase a long-term disability policy on their own.
  • Save for disability while you are still working. While some illnesses and disabilities occur suddenly, many progress over time. For example, the SSA reports that the most common primary diagnosis for workers receiving SSDI or workers' compensation benefits are diseases of the musculoskeletal system and connective tissue, such as arthritis and degenerative disc disease. Also common are mental disorders and disorders of the nervous system and sense organs, such as multiple sclerosis.

"If you are diagnosed with a chronic condition that will likely require you to stop working, you need to start planning for that day as soon as possible," Gada said. "You want to live life to the fullest, but you need to balance that with your future need for income."

Triaging Personal Finances when Disability Occurs

According to Gada, first steps people with serious health conditions or their caregivers should take include:

  • Develop a financial plan. Establish a budget, prioritize expenses and identify how to spend down assets in the least harmful way. For example, using retirement income may trigger penalties, and charging to credit cards ultimately adds to expenses.
  • Cut costs and identify sources of assistance for living expenses. People need to be honest about their circumstances and quickly cut discretionary spending. They also should look at how they can reduce costs for necessary expenses, such as groceries, housing and healthcare.

According to the Allsup Disability Finance poll, the most common assistance people used or considered while awaiting SSDI includes:

  • Assistance Programs Considered or Used Food stamps 58%
  • Prescription drug assistance 38%
  • Medicaid 36%
  • Utility assistance 26%
  • Food pantry 25%
  • Free health clinics 21%
  • Rent assistance 21%
  • Mortgage modification or assistance 17%
  • Local property tax exemptions 12%
  • Free meals for children (school, etc.) 9%
  • Emergency aid (United Way, etc.) 8%
  • Women, Infants and Children (WIC) nutrition 6%

Pursue income sources, including SSDI and long-term disability.

People with long-term disability coverage generally begin receiving benefits three to six months after onset of a disability, though this can vary based on the policy. Additionally, nearly 153 million workers are insured by the Social Security Disability Insurance program through FICA taxes they have paid and may be eligible for SSDI benefits. As it can take more than two years to be approved for benefits, and most people are denied at the initial application level, workers should apply for SSDI as soon as possible. Gada noted that people with disabilities represented by Allsup are significantly more likely to receive SSDI benefits at the initial level.

Don't let healthcare coverage lapse.

Individuals who don't have coverage through a spouse's plan may be able to secure COBRA coverage through their former employer or purchase private insurance. Both are costly, however, and private plans can still deny coverage to people with pre-existing conditions. The Affordable Care Act created Pre-Existing Condition Insurance Plans (PCIPs) as a stopgap until 2014, when insurance companies can no longer deny someone coverage because of a pre-existing condition. However, a person needs to have been uninsured for at least six months before qualifying for a PCIP, and they can be expensive. Individuals aren't eligible for Medicare until 24 months after they begin receiving cash SSDI benefits.

"Unfortunately, people with disabilities don't have many good options for affordable healthcare coverage while waiting for Medicare eligibility," Gada said. "However, to the extent possible, keeping healthcare coverage should be a priority so they can continue to get the medical care they need."

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