What Kind of Disability Insurance Do You Need?

You would probably rather not think about it, but there is a fairly good chance that you might suffer some sort of disability during your working career. It could be just a short-term problem, but it might be more serious, and the costs could be devastating. Some statistics to consider: The Social Security Administration has reported that a 20-year-old has a 33% chance of becoming disabled before reaching the age of 65. The Insurance Information Institute has stated that the average worker, at age 40, has a 14% chance of dying before reaching age 65-but a 21% chance of being disabled for 90 days or more. Disability protection, therefore, may be more of a concern than many of us suspect.

Fortunately, there is a way to provide such protection-disability insurance. What you are really protecting with such coverage is your earning power, so coverage will usually be based on your level of income and normal ongoing expenses. If you're investigating disability insurance, there are a number of considerations.

Do you want short-term or long-term coverage?

You can buy coverage that will pay benefits for a short period (two years or less, generally) or you can buy a more expensive policy that will cover a much longer period-even the remainder of your working years. The choice will depend on your age and profession, as well as other factors.

Do you want protection for "partial" or "total" disability?

You can purchase a policy that will pay you only if you become totally disabled and cannot perform any work at all or you can obtain (at a higher cost) an "own-occupation" policy that will pay benefits if you are partially disabled and cannot perform your usual job.

Should the coverage be inflation-adjusted?

While some disability policies pay a fixed amount for the benefit period specified, others include an inflation adjustment, so the benefits will keep pace with the rate of inflation. For a younger person buying coverage, this feature can be very important, since it is possible that such an individual will face many years of disability payments, if the disability should occur early in his or her career.

What if you have employer-provided disability insurance?

Many employers provide "group coverage" for their employees, but, even if your employer does provide coverage, you may want to purchase a policy to supplement that coverage. That way, you may be able to gain a level of protection that will meet your particular needs-and provide extra peace of mind.

What about the taxation of benefits?

Generally, disability benefits from an employer-provided policy are subject to income tax, but payments from a policy you have purchased for yourself are not.

Other Concerns

When choosing a policy, you also have to consider the "waiting period" or "elimination period"-that is, the amount of time that must pass before payments begin; whether payments will be reduced because of other benefits you may receive; the cost of the policy in future years; and, the policy's renewal provisions.