Long-term disability insurance replaces lost wages due to illness or injury. Statistics reflect the need for disability coverage: Nearly one out of every three workers will suffer a disability lasting three months or more at some point in their career, according to Life & Health Foundation for Education (LIFE). U.S. Census Bureau figures show that nearly one in five Americans will become disabled for a year or more before age 65. These figures gain even more significance considering that 70 percent of working American adults can only afford to take off one month or less of unpaid vacation before everyday expenses would force them to return to work, according to statistics tracked by LIFE.
Because
disability benefits are paid monthly, consider how much money you would
need to pay your bills every month if you were disabled. You generally
can't buy a policy that covers more than 60 percent to 65 percent of your
gross earnings, but if you buy your own policy, you won't have to pay
taxes on your disability checks. That means in essence your take-home
pay would be about the same. Be aware that bonuses and other forms of
pay outside of base salary are generally not included in the calculations.
Many employers pay for disability insurance or for a large part of it, which is a good thing. But if your employer is paying the premiums, then the benefits will be taxable to you. So you need to determine how much you'll have to work with after taxes and perhaps consider purchasing an additional policy.
When shopping for disability insurance, ask if the agent has expertise in disability, warns Woods. Disability is a less standardized and therefore more complicated product.
Here are a few areas to consider:
How long would you want the benefits to last? If you're interested in disability for the long haul, consider putting an inflation protection rider which would increase the benefit.
What's the definition of disability on that policy? In other words, how is your disability determined? Normally the coverage only applies if you are under a doctor's care and unable to work and have a loss of income as a result. If you work in a high-paying specialty, such as dentistry, consider coverage that pays out if you cannot perform your specific job (known as an own-occupation or "own-occ" policy) rather than any job.
The longer
you can wait before beginning to receive disability payments, the lower
the premium will be. Consider building a fat emergency
fund to tap in lieu of early payout on disability insurance, so
you can safely scale back coverage to only kick in when you're out of
work for long periods of time.
