Disability Coverage

Disability insurance replaces income when illness or injury prevent you from earning a living. Chances are you'll never become permanently disabled, but can you and your family take that chance? Could you do without your salary even temporarily?

Disability income insurance comes in two major forms:

(1) Employer-sponsored group coverage provided by your employer (benefits may be taxable), and (2) Private coverage you pay for by yourself (benefits usually are not taxable).

Check with your employer's benefits office to see if you are covered and, if so, how long you must wait before benefits begin, how long payments will continue, and what percentage of your salary will be replaced during your disability.

Many states require employers to offer short-term disability for as long as one year, but, according to the Health Insurance Association of America (HIAA), no laws require employers to offer long-term disability. If you work for a large company you probably have some long-term coverage, but it's not likely if your employer is small.

Group long-term disability benefits typically replace about 60 percent of salary, start when short-term benefits are exhausted, and continue anywhere from five years to life.

How much coverage will you need?

Most forms of coverage limit benefits from all sources to no more than 70 to 80 percent of your pre-disability monthly income. Many advisers recommend provisioning for that same replacement percentage in retirement, so this is an amount you should be able to live on.

Other tips:

  • Be wary of "optionally renewable" or "conditionally renewable" policies in which coverage is extended only if the insurance company decides to do so. You could find yourself left out in the cold. Instead, look for non-cancelable policies (premiums and benefits don't change) or guaranteed renewable policies (premiums may increase, but you can't be dropped).
  • When you buy, consider a policy that pays disability benefits for both accident and illness. Some policies pay only for accidents, but you want to be insured for illness too. In fact, as you get older, it is more likely that you will need to be covered for an illness than for an injury.
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