Disability Insurance

The probability of being disabled at any particular time is much higher than the likelihood of dying. Yet many people who wouldn't dream of going without life insurance don't understand the importance of disability income insurance.

Through disability insurance, people with high incomes can generally find policies that will replace 30–60 percent of their income should they become disabled. Middle-income people might find coverage for replacement of 50–75 percent of their income. It's generally not possible to replace 100 percent of your income.

What does the government provide?

There are a variety of government disability programs:

• Social Security disability insurance pays benefits to qualified individuals under age 65.
   
• Supplemental Security Income pays benefits if you are over 65.
   
• All states offer workers' compensation, but only if your injury or illness is work related.
   
• Military personnel are entitled to veterans' benefits only if their disabilities are service related. If you're injured in a traffic accident or at home, you may be out of work—and out of an income.

What qualifies as a disability?

For insurance purposes, you're considered disabled only if you meet the insurance policy's criteria. While there are many definitions, it all hinges on how an illness or injury affects your ability to work, or how it affects your ability to earn income. When you purchase a disability policy, make sure you understand what's covered.

Two types of disability insurance

There are two main types of disability insurance:

• Short-term policies cover disabilities that last for a few weeks or months.
   
• Long-term policies can provide coverage for anywhere from two to five years, or even until you reach age 65.

If your employer offers a disability insurance policy, it is most likely short term. In this case you may want to purchase additional long-term coverage on your own. This will also protect you in case you leave your job.

How much coverage do you need?

Start by determining how much money you need each month to pay your bills if you become disabled. Policies generally won't cover more than about two-thirds of your gross earnings. However, if you buy your own policy you won't have to pay taxes on your disability checks. That means that your take-home pay would be about the same.

Things to consider when buying a plan

• If you become disabled, you'll have to wait a certain amount of time (the elimination period) before you receive benefits. Once you start receiving benefits, you'll get them for a certain amount of time (the benefit period). The shorter the waiting period or the longer the benefit period, the higher the premium.
   
• A cost-of-living clause will increase your benefits with inflation. Having this provision will increase your premiums.
   
• A non-cancelable policy can't be canceled, and the company cannot change the benefit or the premium.
   
• A guaranteed renewable policy can't be canceled, BUT the company can adjust the premium.