How to Buy Disability Insurance

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Here's a sobering thought: You're far more likely to suffer an injury and lose time from work than you are to be killed outright. Even the most systematic and aggressive savings program can be drained if you're unable to work for a year or more. That makes disability insurance--which provides an income if you're injured and unable to work--an absolute must.

Learn about the elements of a disability plan. The benefits period is how long the policy will continue to provide you an income. The elimination period is the time between when you're injured and when you start getting benefits. Most policies provide benefits to age 65, but offering only two years of benefits is not unheard of. Be clear on what type of coverage you have.

Find out if your employer offers a disability plan. It's not common, but it is out there.

Make sure your plan provides enough coverage. Most long-term disability plans replace only 60 percent of a base salary, up to a maximum of $5,000 per month in benefits (bonus and commission income is not covered).

Know what is covered. Many disability insurance policies have strict guidelines for which disabilities are covered and which are not. For example, mental disabilities and incapacitation are gray areas. Read the fine print.

Calculate your financial needs. If you were laid up for a year, how much would you need for you and your family to live? Be sure to factor in future expenses, like college educations. Bring your financial picture into focus and compare that to the coverage. Being underinsured can be a big financial risk.

Shop around for a disability plan if your employer doesn't offer one. Contact agents and search online sites that give rate quotes. Large insurance providers all offer disability packages.

Supplement your company's plan with individual long-term disability coverage if your employer's program won't cover all of your family's expenses. Individual coverage can go as high as $10,000 to $15,000 per month, but it's tax-free if you pay the premium.

Expect to pay a sizable premium. Don't be surprised if your annual premium tops $1,800.

Tinker with your policy so you get adequate coverage without paying too much. The less you settle for in monthly benefits, the lower your premium.

Tips & Warnings

  • If you can only afford limited disability coverage, try to protect yourself with as much savings as possible.
  • If the coverage is too expensive, increase the elimination period, say from 60 days to 90 days, to cut your costs.
  • You can buy optional riders that provide for cost of living and future earnings increases. If you are in your 20s or 30s, this may be a good addition to consider.

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