Disability insurance more crucial than you may think

BY TERRY SAVAGE Published: June 4, 2012
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Disability insurance is one of the most overlooked products in the insurance industry. No one wants to think about how different life would be if you were suddenly disabled and couldn't work, as a result of an accident or illness.

But how about this fact: Between the ages of 25 and 65, you're four times more likely to be disabled than to die.

Unlike life insurance, disability insurance is not there just to protect your loved ones when you are gone. Disability insurance is designed to give you monthly income to continue to pay your mortgage, rent or car payment — even though you can't work.

Yes, Social Security does have a disability program (SSDI). But it is notoriously difficult to access that coverage, and you might even need a lawyer to help you press your claim. The process could take years.

That's why you need to consider buying your own coverage — even if you have some coverage at work.

That employer-paid policy may not be transferrable if you leave your job, and the benefits are likely to be taxed if you need to use the policy. But if you purchase a disability insurance policy on your own, with after-tax dollars, any benefits will come to you tax-free.

Generally speaking, disability insurance is a good idea even in your 20s, and especially if you have no one else to provide for the basic costs of daily living in case you become disabled. Single parents might also have a special need for this insurance.

As you reach your late 50s, and are closer to receiving Social Security retirement income benefits, you might want to switch your premium dollars to long-term care insurance, which becomes the greater and more costly risk.

How much coverage do you need? Of course, you'd like to replace all your income if you are unable to work. But no insurance company is going to write a policy that gives you that incentive!

Instead, you will probably qualify to replace only about 60 percent of your current income, which must be documented at the time of purchase.

The higher your income, the smaller the percentage the insurance company will replace. That is, if you earn $50,000 a year, you could replace 60 percent of your earnings; but if you are a highly paid professional earning $300,000 a year, you will probably max out with benefits of $10,000 per month.

The amount of coverage and cost will also depend on your occupation. Almost paradoxically, the higher-income professions, such as lawyer and doctor, pay less per dollar of coverage — and get more lengthy coverage — than a carpenter or electrician, who may qualify for only five years of disability payouts.

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