Advisor Resources: BMO Wealth Institute

Understanding disability – planning for financial well-being

Senior woman playing checkers

A disability can affect a family in so many ways: physically, emotionally and financially. Dealing with these pressures can put added stress on the financial well-being of an individual, their family and their caregivers. With the incidence of disability rising as our population ages, disability should be a concern and a shared responsibility for all.

This morning as you drove into work you probably experienced some of the dangers caused by distracted drivers around you – talking on cell phones, texting, following too closely, or otherwise not following safe driving practices.

Based on 2012 motor vehicle data from the U.S. Consumer Product Safety Commission and the Centers for Disease Control and Prevention (CDC), more than 2.5 million adult drivers and passengers were treated in emergency departments after being injured in a motor vehicle crash. Of those treated, over 164,000, or about 52 out of every 100,000 people in the country are hospitalized each year as a result of a serious injury.1 While this number has dropped dramatically over the last twenty years the cost of a serious injury continues to have a dramatic impact on families and on society as a whole. In 2003 the CDC determined the economic costs over a lifetime for an individual with a severe impairment to be approximately $1 million.2 Since that time, the cost of health care has risen dramatically. These costs can have a devastating effect on a family.

Defining disability

There are many definitions for the word “disability”, from restrictive definitions that allow access to certain services or government-provided entitlements, to broad definitions that are more reflective of the impact that disability has on society. The United States Census Bureau uses a definition for disability that includes impairments, activity limitations, and factors that restrict participation. Disability is categorized into three broad domains: communicative, mental and physical. Significantly, 56.7 million people (18.7% of the population) were considered disabled in 2010, and of those about two-thirds (12.6% of the population) were considered severely disabled. This is a significant increase from only five years earlier.3

Incidence of disability rises with age

The Administration on Aging, a department of Health & Human Services, estimates that the U.S. population is aging quickly.

Disability Prevalence and the Need for Assistance by Age: 2010

People age 65 and over represented 12.4% of the population in 2000. By 2030, as much as 19% of the population will be age 65 and over. This represents a doubling of the senior population during this 30 year time span.4

With the population aging, the incidence of disability will rise substantially. The chart above from the United States Census Bureau shows how the prevalence of disability increases as the population ages. The most frequently cited contributing causes of disability as the population ages are loss of hearing, mobility and memory.

For advisors:

At BMO Global Asset Management, we believe better conversations lead to better outcomes for your clients. Demonstrate your value by asking the right questions about financial planning. Complete the form below to receive a “conversation starter” supplement to this report.

Thank you for your interest in this BMO Wealth Institute report. A member of our team will reach out to you within 24 hours with a conversation starter guide.

 

Wider effects of disability

Family Impacts:

  • Reducing earning potential
  • High costs of care
  • Burdens of care on family members

Caregiver Impacts:

  • Physical and mental health conditions
  • Less opportunity to earn income
  • Reduced contributions to savings
  • Disruption to personal and family life
  • Out-of-pocket expenses

Employer & Government Impacts:

  • Absenteeism
  • Lost productivity
  • Reduced tax revenues

The financial impact of disability

Whether caused by accident or illness, disability can be financially catastrophic for a family. One notable statistic from the Social Security Administration estimates that just over 1 in 4 of today’s 20 year-olds will become disabled before the age of 67.5 Planning for the possibility of disability should be an important consideration in any financial plan; however many people are financially unprepared.

The devastating impact of a disability or major illness before retirement

As an example of the financial impact of disability, consider a couple whose financial plan is significantly impacted by a suddenly occurring disability that stops the husband from working at the age of 55. This would be a full 10 years before the couple’s planned retirement. The combination of reduced income and increased spending to deal with the disability can overturn a financial plan that had been on track to last until at least the age of 90 to one where all of the couple’s savings would be exhausted by the age of 77.6

By comparison, if the couple had sufficient disability insurance coverage – through an employer plan or purchased personally – the financial damage could have been greatly reduced. The cost of a disability insurance policy varies widely depending on personal circumstances, age and the length of the elimination period chosen. A policy with a 90 day elimination period that would provide a monthly benefit of $3,000 may only cost about $85 per month, or about $1,000 per year.

Some options that make disability policies more valuable include:

  • Cost of living adjustments
  • Return of policy benefits

“Own Occupation” benefit rider (This option is recommended for professionals or skilled workers and protects against the loss of benefits in the event that the insured is able to return to any gainful occupation other than their chosen field.)

 

Download PDF

 

1 Overall MV-Occupant Nonfatal Injuries and Rates per 100,000.
National Center for injury prevention and Control, Centers for Disease Control and Prevention. 2012.
2 Economic Costs Associated with Mental Retardation, Cerebral Palsy, Hearing loss, and Vision Impairment – United States, 2003. Centers for Disease Control and Prevention, 2004.
3 Americans With Disabilities: 2010. Brault, Matthew. United States Census Bureau. 2012.
4 Aging Statistics. Administration on Aging. 2013.
5 Disability Planner: Social Security Protection If You Become Disabled. Social Security Administration website.
6 The biggest life events that can derail your financial plan. BMO Wealth Institute. May 2013.

BMO Global Asset Management does not offer tax advice. Contact your tax advisor.
This information cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. This information is being used to support the promotion or marketing of the planning strategies discussed herein. BMO Financial Group and its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors.
Estate planning requires legal assistance which BMO Financial Group and its affiliates do not provide.
BMO Wealth Institute, a unit of BMO Financial Group, provides this commentary to clients for informational purposes only. The comments included in this document are general in nature and should not be construed as legal, tax or financial advice to any party. Particular investments or financial plans should be evaluated relative to each individual, and professional advice should be obtained with respect to any circumstance.

You are now leaving the BMO Global Asset Management web site:

The link you have selected is located on another web site. Please click OK below to leave the BMO Global Asset Management site and proceed to the selected site. BMO Global Asset Management takes no responsibility for the accuracy or factual correctness of any information posted to third party web sites.

Thank you for your interest in BMO Global Asset Management.

You are now leaving the BMO Global Asset Management web site:

The link you have selected is located on another web site. Please click OK below to leave the BMO Global Asset Management site and proceed to the selected site. BMO Global Asset Management takes no responsibility for the accuracy or factual correctness of any information posted to third party web sites.

Thank you for your interest in BMO Global Asset Management.

You are now leaving the BMO Global Asset Management web site:

The link you have selected is located on another web site. Please click OK below to leave the BMO Global Asset Management site and proceed to the selected site. BMO Global Asset Management takes no responsibility for the accuracy or factual correctness of any information posted to third party web sites.

Thank you for your interest in BMO Global Asset Management.

You are now leaving the BMO Global Asset Management web site:

The link you have selected is located on another web site. Please click OK below to leave the BMO Global Asset Management site and proceed to the selected site. BMO Global Asset Management takes no responsibility for the accuracy or factual correctness of any information posted to third party web sites.

Thank you for your interest in BMO Global Asset Management.