Disability Insurance: Earnings Protection When You Need It Most

You never know when a long-term disability from an accident or illness will strike. If you aren't prepared, it can devastate you financially. That's why it is critically important to have disability insurance. It provides a replacement for a portion of your income should you become disabled and unable to work.

Many people don't see the need for private disability insurance because they believe they are protected by Social Security disability benefits. To be eligible for Social Security disability, you must be severely disabled. In addition, there is a six-month waiting period before benefits begin. The amount of the payment may not be sufficient to cover your family's needs. Even if you can supplement Social Security with your savings, if the disability continues for a long period of time, you will most likely exhaust your reserves before you are able to return to work. Disability insurance is a far more sensible alternative to finance a long-term disability.

Depending on the amount you earn, the maximum coverage you can obtain will replace 45 to 70 percent of your salary. Your premium cost will depend on how risky your job is considered. Generally, those employed in a professional capacity are considered lower risks than those employed in occupations requiring physical labor. Other factors that are taken into account are your age, your health history, and the overall coverage the policy provides.

If you purchase disability coverage on your own, as opposed to being covered under a work-related policy, the income the policy provides while you are disabled is tax-free. If your employer has a disability plan, it is important to know the amount of coverage, the waiting period, and the length of the benefit period so that you can coordinate your own disability policy with the coverage provided by your employer.

There are several provisions to look for in any disability insurance policy you are considering purchasing:

How does it define "disability?" Disability can mean either the inability to perform the main duties of your own occupation, or the inability to perform any duties of any job. Look for the provision that defines disability in terms of your own occupation to get the best coverage.
Is there a non-cancellation clause? This means that the insurer cannot cancel your policy or increase your premiums before you turn 65 as long as the premiums are paid on time.
Are there residual disability payments? This provides you with benefits in proportion to your lost wages should you remain partially disabled and have to take a job that pays less than what you were earning before you became disabled.
Will you remain insurable in the future? This allows you to purchase future coverage without having to be medically insurable.
How long will benefits last? Most policies provide benefits until age 65.
How long is the waiting period? The shorter the waiting period, the higher your premiums. If you have employer disability benefits, you will want to stretch the waiting period on your personal policy so as to reduce the cost.