Among the findings in Zurich Insurance’s recent income protection gap survey, these were particularly troubling: Two-thirds of Americans do not have enough savings to cover expenses for six months if they become ill or disabled and are unable to work, and more than one in four would deplete their savings in less than a month.
This is particularly startling when you consider that 45 percent of Americans surveyed said they had experienced lost income due to illness or disability, and nearly a third (31%) of Americans surveyed said they had experienced a loss of income due to illness or disability that lasted more than six months.
To put it bluntly, most Americans are not adequately prepared for income loss, and many may end up having to default on loans, deplete all of their savings and experience a humiliating erosion of their social status.
What can be done to close this so-called “income protection gap,” which is the reduction in household income caused by the death or incapacitation of an adult wage earner on whom the household relies, taking all public and private sources of replacement income into account?
The first step is to raise awareness about the issue.
It is worth noting that 40% of Americans do not own a life insurance policy, according to the 2016 Insurance Barometer Study. Many believe the cost of such policies is too high. But attitudes toward life insurance are changing: Two-thirds of consumers say they are at least somewhat likely to recommend ownership of life insurance to others, and an overwhelming majority (86 percent) agrees that most people need life insurance.
Individuals alone may not have sufficient resources to bear the burden of closing the gap. The solution may need to come from the combined efforts of individuals, families, employers and government.
For example, in the absence of increased funding, governments can use tax incentives to encourage employers and/or third-party providers to address any gaps.
Employers can make a difference too, by offering integrated disability management, group disability, accidental death and dismemberment, workplace disability, workers, compensation and death coverage that can help protect employees against the loss of income. Without employer-sponsored benefit programs, many employees may not be able to afford individual disability and life insurance policies or simply would not make it a priority to seek coverage.
Without adequate solutions to help close the income protection gap, employers may be faced with reduced employee productivity. For example, inadequate protection and poor job prospects can induce employees not to disclose their inability to work at full capacity. Instead, they may continue working at reduced capacity. This type of “presenteeism” is widespread. According to the Harvard Business Review, one study estimates the annual cost to U.S. business at more than $150 billion per year. Left unchecked, income protection gaps are likely to have a greater impact on productivity as the average age of workers rises.
In addition, income and life protection benefits from employers can be used to retain and attract talent in today’s ultracompetitive skills market.
Income protection gaps are a real and a growing challenge—for individuals and families, but also for businesses, policymakers and society as a whole. For families, the financial impact of illness, disability or death of the main breadwinner can be devastating. Many families suffer from severe economic loss followed by financial hardship, a drop in self-worth and their standard of living.