Discretionary or necessary?
Most people consider medical insurance protection to be an essential part of financial security, but where does disability insurance fall?
Since passage of the Pension Protection Act of 2006, employers have been authorized by the Department of Labor to automatically enroll workers into 401(k) plans. This has proven to be a great way to encourage employee retirement savings and is generally seen as a favorable process for both employers and employees.
While there have been uses of automatic enrollment in other product lines, widespread authorization and support of the practice by the DOL was not published until Dec. 4, 2018. At that time, the DOL noted the belief that extending the ability of employers to offer employees automatic enrollment in disability coverage would be important for employee financial wellness.
Related: 10 top causes of disability claims
First, what is discretionary income? By definition, disposable income is the money an employee takes home after payroll tax. In contrast, discretionary income is the money the employee has left after paying necessary expenses—rent or a mortgage, regular bills for utilities, food for the family, auto expenses and clothing. Most people would also include cell phone, internet and home entertainment services in this category, even though they increasingly represent discretionary expenses.
Where do benefits fit in the spectrum? Certainly, most people consider medical insurance protection to be an essential part of financial security. And most would also classify contributing money to a retirement plan and a basic level of life insurance to be necessities. But what about income protection? The author of the article assumed that it was to be funded from discretionary income. To me, that is a great example of misclassifying a necessary expense.
Think about the value of disability income protection. If you can’t work and are unable to earn a paycheck, how are all the other necessary expenses going to be paid, to say nothing of the discretionary expenses people would like to be able to pay? Yes, at some point Social Security disability benefits may be payable. But how long can most people go while they wait months or years for that determination?
Then there’s the cost of income protection. Most people overestimate the expense. Let’s consider someone making $50,000 a year. For a typical worker, a long-term disability income protection plan will cost less than four dollars a week. A short-term plan might cost another six dollars a week. In other words, for about 1 percent of their gross wage, employees have protection against the inability to work and earn a paycheck.
How does that cost of $10 a week stack up to other necessities? It’s a big bargain. Rent, car payment, utilities, phones, internet … all are going to cost way more than $10 a week. Meanwhile, in the discretionary category, how many people spend more than $10 a week on expensive coffee or other beverages? How many people think nothing of spending that much on pay-per-view entertainment?
It’s time to stop thinking that the purchase of disability income protection is discretionary. It’s not. It is absolutely necessary.
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