Disability Insurance: Why Coverage Matters More Than You Think

You may think you don't need disability insurance — but you probably should have generous coverage.

Whether you have group disability insurance from your company or buy it yourself, chances are you underestimate or cannot afford what you need for short-term or long-term insurance in the event of sickness or injury.

Even if you have group disability insurance, it may not be enough. The drawbacks include:

• Coverage may be limited to a short term, perhaps only two years.
• Coverage may have dollar limits.
• The wait for benefits to start may be longer than your savings will last.

For these reasons, you may want to buy individual disability coverage to supplement the group plan or provide protection that's lacking in that plan.

Here are eight tips to keep in mind when you consider buying a disability policy:

1. If you pay with after tax dollars, the monthly insurance payments are not taxable. If you pay with pretax dollars, they are taxable.‍

The Limits of Federal Aid: Federal Workers' Compensation and Social Security disability payments might help if you become unable to work, but the payments are limited and you may not qualify for them.

More than half of all applicants for Social Security disability benefits are turned down. And Workers' Comp pays only if you're injured on the job. If you become disabled in some other way, you're out of luck.

‍2. People in professional occupations have an easier time getting disability insurance. Nobody wants to insure a roofer or others who work in risky occupations.

‍3. Yearly premiums depend on the amount of insurance -- $150,000 may cost around $3,000 a year. Most people buy only the amount they can afford.‍

4. The cheapest route is getting disability insurance through your own company, but if you leave the company, you will lose the coverage.‍

5. Members of professional organizations may be able to buy a group policy that will cost less than buying an individual policy on the open market. If you get a policy through an organization, be sure it allows you to keep it as long as you remain a member.‍

6. Most policies have an exclusion policy. You have to be disabled for a number of days, usually 90, before payments start. Premiums are higher if you want the insurance to kick in earlier.‍

7. Disability payments stop between the ages of 65 and 70. Make certain you have plans and savings that last beyond that. If you're 55 and have a lot of money saved up, you don't need as much disability insurance as someone who is 30 and doesn't have a big savings account. Disability insurance policies cover only 60 percent of your income. You can buy another policy that covers the rest.‍

8. Benefits are pegged to your income before a disability. You can probably only buy coverage that pays 60 percent to 80 percent of your income from all sources (that's about what you'd get in your paycheck after taxes). For example, if you earn $10,000 a month, insurance companies might not want you to have more than $6,000 to $8,000 a month in disability benefits. With group coverage, you might qualify for another $2,000 in supplemental individual benefits.

Here are a few other factors to consider and discuss with your insurance adviser when shopping for disability coverage:

• Try getting individual coverage first. Get the most coverage you can, based on your income. Then, you may be able to get additional coverage with a group plan. If you start with group coverage, the insurance companies probably will put a limit on individual coverage.
• To cut costs, consider a policy that pays until age 65. This would be a smarter move than buying a policy that pays lifetime benefits. If the purpose of disability insurance is to replace lost income, you might not be earning income after 65 anyway, so the extra coverage would be superfluous. That's particularly true if you have other assets you can tap into. However, without those assets you may need lifetime benefits. If so, you can cut costs somewhat by extending the waiting period before benefits begin to 90 days or longer.
• Check into how a policy defines disability. An "own occupation" policy provides benefits if you can no longer perform the duties in your customary job. Other policies only pay if you're unable to work at any job that you're reasonably trained to do.

The Limits of Federal Aid

Federal Workers' Compensation and Social Security disability payments might help if you become unable to work, but the payments are limited and you may not qualify for them.

More than half of all applicants for Social Security disability benefits are turned down. And Workers' Comp pays only if you're injured on the job. If you become disabled in some other way, you're out of luck.