What is disability insurance

How would you support yourself and your family if you became ill or were injured for a long period of time? Tight economic times may make it tempting to remove unnecessary "extras" from your budget, but is disability insurance really an extra? Not if you consider that before you turn 65, you could be among the nearly 1 in 5 Americans who will become disabled for a year or more.

 

Disability insurance gives you monthly income should illness or injury prevent you from working. Besides covering the daily cost of living, it helps you handle medical costs, including equipment or alterations to your car or home that an injury requires.

 

This depends on your personal situation. If you're young, single and in good health, it may be that short term disability insurance is all you currently need. But if you're supporting a family, both types of disability insurance might be a good idea.

 

Short-term disability policies are geared towards illnesses or injuries that promise relatively quick recoveries. They usually come with a two-week waiting period and may pay as much as 100 percent of your income, but generally for no more than two years.

 

Long-term disability policies are designed to cover you when illness or injury keeps you out of work for an unlimited period of time. These benefits can last anywhere from a few years to the rest of your life. However, they generally cover only 40 to 60 percent of your income, and carry much longer waiting periods.

 

All disability policies have waiting periods. Short waiting periods, 30 to 60 days, bring higher premiums than longer waiting periods, which is why it's best to choose a 60 to 90-day waiting period.

 

Disability insurance is sold by many insurance companies that also provide health insurance. It's designed to pay a percentage of your income if you should become disabled through non-job related injury or illness. It's not the same as workmen's compensation, which is linked to injury or illness that occurs as a result of your workplace conditions.

 

Disability insurance may not be a basic part of most health insurance plans. Some states have different requirements regarding the duration of short-term disability benefits, but no law requires employers to provide long-term disability. As a result, the best option may be to purchase disability insurance on your own.

 

If you do have disability as part of a group plan, you'll need to know what proportion of your salary your group plan pays, and if there is a monthly limit on how much you can receive. Keep in mind that you must pay taxes on your disability income, unless your employer does. Also keep in mind that buying disability through work restricts your choices to the companies and products in your employee benefits package.

 

By contrast, an individually owned policy will pay 50 to 70 percent of your income, and the benefits aren't taxed, since you are the one paying the premiums. Also, you can take your own policy from job to job, unlike employer-provided coverage, which is rarely transferable.

 

Finally, there are some circumstances in which you can purchase disability insurance through the Social Security Administration. However, eligibility requirements are tough and payments are low.

 

You can purchase disability insurance from a licensed insurance company or agent, who can conduct a needs analysis to decide how much coverage is best for you. Your state insurance department will have the names of licensed agents and companies. Or you can ask friends or colleagues for recommendations. Take the time to research a company's financial stability by checking with a ratings agency like A.M. Best Company, Fitch Ratings, Weiss Research, Standard & Poor's or Moody's Investor Services. While you can purchase disability coverage on the Internet, the Web sites you visit are likely to lead you to insurance agencies or agents, whose prices will be comparable to those you'll find online.

 

Once you have selected a policy, check your application to make sure there are no errors. Some policies offer a 10 to 30-day "free-look" period, allowing you to change your mind. Check your policy occasionally, to make sure your coverage reflects your current needs. Since exchanging policies - after the free-look period is over - will cost you money, you might opt to get more insurance protection by adding to the policy you already have.

 

Disability policies offer two types of protection. If a policy is "noncanceleable," the insurance company may not cancel it (unless you don't pay the premiums), and you may renew it annually, with no price increase or benefit loss. If a policy is "guaranteed renewable," you may renew it with the same benefits. While your insurer can't cancel the policy, it can raise your premiums.

 

There are other ways to protect your coverage, although they're likely to increase your premium. For example, a higher premium will buy you a cost of living adjustment, which raises your disability benefits as the cost of living increases.

 

SOURCES: Disability Insurance, The Life and Health Insurance Foundation For Education, Washington, DC; http://www.life-line.org/di.html; Disability Insurance Information, Insurance Information Institute, New York, NY, http://www.iii.org/individuals/disability/