Why Disability Insurance Matters

This article originally appeared in Human Resource Executive. 

Responding to Risk

Whether working in healthcare, for an insurance company, consulting with employers or running a nonprofit, the basic and vexing problem I’m trying to solve is behavior change and how, ultimately, human beings evaluate and respond to risk.

The longer I work in and around employee benefits, the more I’ve come to appreciate that there are enormous advantages to health- and financial-benefit programs that either a nation or an employer selected and paid for.

Unfortunately, most adults evaluate hazards differently than risk-considering people like me, HR executives or actuaries.

The Risk Equation

When Texas cattle producers sued Oprah Winfrey for creating “a lynch-mob mentality” among viewers during a 1998 episode on beef safety at the time of the mad-cow-disease scare, Peter Sandman described a formula for how people evaluate risk: Risk = Hazard + Outrage. Sandman wrote [bracketed words are mine]:

To the experts, risk means expected annual mortality [or financial ruin]. But to the public (and even the experts when they go home at night), risk means much more than that. Let’s redefine terms. Call the death rate (what [many] experts mean by risk) “hazard.” Call all the other factors, collectively, “outrage.” Risk, then, is the sum of hazard and outrage. The public pays too little attention to hazard; the experts pay absolutely no attention to outrage. Not surprisingly, they rank risks differently.

Peter Sandman, Risk Communications Consultant

During and following World War II, when most developed nations chose to provide its residents with healthcare and financial benefits, they unconsciously acknowledged our frailty as humans in evaluating risk.

Rights to Protection

On Jan. 11, 1944, President Franklin Delano Roosevelt attempted to persuade Congress and the nation of the value of a “second bill of rights” (also known as an economic bill of rights) during his State of the Union address. Included on the list were the right to adequate medical care—and the opportunity to achieve and enjoy good health—and the right to adequate protection from the economic fears of old age, sickness, accident and unemployment. Several of FDR’s rights were addressed in programs such as Social Security. But employers continued to bear some of the onus they picked up during World War II by not abandoning employee benefits such as healthcare coverage.

A Shift in the Industry

As employee-benefits costs—led by healthcare expenses and poor pension investments—began to incur precipitous financial consequences for businesses during the 20th century, employers began the shift to cost-sharing with employees. (It’s a trend that continues today.) The advent of this change, coupled with the rise of cafeteria plans, put workers in the risk-assessment driver’s seat. They often made selections that make me shudder.

The latest information that has me losing some proverbial sleep at night is this: An analysis of economic research by a New York Times reporter that showed a trip to the hospital can mean a permanent reduction in income for a substantial fraction of Americans. Some people bounce right back, but many never work as much again.

Health Event Results in Financial Pressure

For non-elderly Americans with health insurance, the analysis found, hospital admissions increased out-of-pocket medical spending, unpaid medical bills and bankruptcy, and reduced earnings, income, access to credit and consumer borrowing.

Most importantly, the earnings decline is substantial compared to the out-of-pocket healthcare spending increase, and is minimally insured prior to age-eligibility for Social Security Retirement Income—meaning that at least a third of working adults have no private disability insurance.

Employer Paid Insurance Helps Ease Financial Burden

Employees who are hospitalized on average experience an $11,000 decrease in earnings per year by the third year after they were hospitalized and it does not go up. More importantly, 60 percent of people experiencing an earnings decrease never returned to work. This is compared with out-of-pocket spending where people with health insurance paid $300 and people without insurance paid $6,000.

“I’ve spent all but two years of my career working in disability insurance. I’ve never understood how an employer can in good conscience terminate an employee who cannot return to work due to an illness or injury without having long-term disability coverage in place for them.”

Dick Mucci, president of the Group Protection Business at Lincoln Financial Group

Disability Insurance Awareness

Given we are the start of May which is Disability Insurance Awareness Month, I’d like to think how we can effectively get employers to offer—if not pay all or part of the costs of—short- and long-term disability insurance.

To read Carol’s complete article at HR Executive, please click here.