Looking out for yourself with disability insurance

In case anyone has forgotten, we’re all basically on our own here in personal finance land.

It began with the transition from pensions to retirement accounts, when we had to start deciding how much to save and pick among scores of (often terrible) investment possibilities.

Then came health insurance, where employers once paid the premiums but now pay less while offering a confusing menu of plans. Their workers are fortunate, however, compared with people without employer-provided plans and the shopping gantlet they must run. Now, most of those people must buy insurance by law but do so on exchange websites or other places where it’s hard to get nearly enough information to make an informed choice.

So it should come as no surprise that long-term disability insurance, for truly wretched illnesses or injuries that put people out of work, seems to be moving in the same direction. Many large employers still provide it gratis, but an increasing number are lowering the payouts and giving employees the option of purchasing more. Other employers may pay nothing toward the premium and simply give workers the opportunity to buy it with their own money via payroll deduction. The small number of people who have no employer-offered disability insurance and still buy it on their own must find an agent, but most American workers don’t have any private disability insurance.

More responsibility. Lots of choices. Confusing products. The repetitive pattern might be amusing in its predictability if it weren’t for the millions of hours people spend trying to sort these choices out and the billions of dollars they lose picking the wrong products.

There is some hope that this is a problem that technology can help solve. But before we talk about a possible solution, we need to understand exactly what we’re dealing with here, since most people give almost no thought to long-term disability insurance at all.

“Income replacement insurance” might be a better way to think of this coverage, since that’s what it is designed to do. The “long term” means that it generally kicks in after at least a few months, a period that a separate “short term” disability policy might cover in the workplace. Individuals don’t shop for short-term coverage on their own, since most people would rely on savings during a brief period of illness or injury if they didn’t work for an employer that offered short-term coverage.

Long-term disability insurance usually replaces up to about two-thirds of your income if you can no longer do your own job (or any job, depending on the policy terms). Premiums tend to run roughly 1 to 3 percent of your annual income, depending in part on the results of a medical exam that most people not getting coverage through an employer have to take. You can’t buy coverage to replace any more of your income, since insurers worry that there wouldn’t be enough incentive to try to get better. Any payout is taxable if an employer pays for your premiums and tax-free if you buy the insurance on your own.
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Trying to calculate your odds of needing the coverage is complicated. Industry representatives cite odds of one in four over the course of a person’s working life and a 34.6-month claim period before recovery, but people with white-collar jobs who lead healthy lives will have much lower odds, as I noted in a 2010 column documenting statistical exaggerations in the industry. Most often, the “disability” results from an illness or condition like back pain, not the accidents that most people fear when they think about the term.

Given the high price, most people who consider buying the coverage on their own talk themselves out of it using logic that goes something like this: I’m white collar. The odds are with me. If I go down, my extended family and friends will help. I can use my retirement savings or home equity if need be and work longer or live on less or downsize. And besides, the insurer won’t pay anyway if my condition requires a close call on whether I actually qualify.

This may be flawed thinking. Many of these same people do have life insurance, even though the odds of early death are lower than the odds of a long period of disability. Think about it this way: If you’re dead, at least there are no costs associated with being alive. But if you’re alive and not earning, your family will still need to feed, house and perhaps care for you for years or even decades, or you’ll have to do it yourself. The disability coverage that Social Security offers can help some, but receiving an initial payout takes time if you qualify at all and the check tends not to be very large.

Employers recognize the enormous coverage gap, and bigger ones have traditionally offered long-term disability policies as a fringe benefit without charging employees for the privilege. Those workers often barely noticed the perk, though older ones were grateful, given that group coverage like this doesn’t require invasive medical tests aimed at screening out the already unhealthy.

If you’re a benefits consultant these days, however, you’re doing a lot of modeling for employers on the cost savings for policies that would replace, say, 50 percent of income instead of 60 percent. Employees then have a choice about whether to pay for more coverage. According to Aon Hewitt, 35 percent of their clients now have coverage like that.

There is a certain logic to giving employees more choice, according to Anita Potter, assistant vice president for group product research at the consulting firm Limra. “They’re the ones that know best which of the benefits are going to be most beneficial,” she said. But it’s also just one more unfamiliar financial product that people need to learn about, one with unclear odds that almost inevitably taps emotion even more than reason.

Into this haze comes a start-up called PolicyGenius. Its two founders, Jennifer Fitzgerald, 36, and Francois de Lame, 31, are former McKinsey consultants who often found themselves slapping their heads in astonishment while on assignments with insurance companies. There, executives would sometimes define their customer as the sales agents, not the actual users of the policies. “This was a weird way to sell to human beings,” Ms. Fitzgerald said.

So they got their insurance sales licenses, set up shop in the glamorous neighborhood of Williamsburg, Brooklyn, and began selling some decidedly unsexy policies online. Their overall five-minute insurance checkup, with its friendly user interface, is well worth taking if you don’t mind revealing some personal data. But it’s their attempt to sell long-term disability insurance online that is especially groundbreaking.

The company’s quote generation process and long-term disability education guide are the best I’ve seen by far, but that’s not saying much since so few companies even try to sell the policies without a live conversation. “I have no delusions that people will be lined up at the door to buy this stuff,” said Byron Udell, one of the Internet-selling pioneers in the industry who started and still runs the online insurance site AccuQuote. He called PolicyGenius’s interface “cute,” though he meant it as a compliment.

PolicyGenius doesn’t buy the argument that coverage like this is sold, not bought. The founders believe that if they can educate consumers with materials that are friendly and sensible, then younger customers who are used to sorting their lives out online will sell themselves on the need for disability insurance.

It is not clear whether the experiment will work. The quotes PolicyGenius provides from insurance companies and the side-by-side policy comparison charts are a model of clarity, though the founding pair have very little experience actually selling the policies so far. Even the youngest doctors and dentists, who are big purchasers of long-term disability policies, tend to default to buying coverage from whatever agent their slightly older colleagues use.

Still, we live in a world with an increasing and frustrating tendency to push people into making big financial decisions on their own, often before the experts themselves know what the right ones are. In that regard, the education that PolicyGenius is providing is a true public service, regardless of whether it ultimately succeeds as a business.

Written by: Robert Neubecker for The New York Times
A version of this article appears in print on September 13, 2014, on page B1 of the New York edition with the headline: Looking Out for Yourself With Disability Insurance.