Disability Insurance

Disability insurance replaces a portion of your income in the event of a disabling accident, helping you to pay your mortgage or rent and some of your bills. Even people who have a relatively large emergency savings account would probably be in trouble if they found themselves unable to work for an extended period of time.

Like most types of insurance, you may hope and plan never to need it but accidents do happen and when they do, your insurance policy may be a big help. Disability insurance can help you pay your rent or mortgage and other critical bills when you can't work.

To qualify for disability insurance, you must earn an income, be in good health when you apply and work in an insurable occupation. Some especially dangerous occupations are too risky to insure.

Comparing policies
If you decide to consider disability insurance, look for a plan that will:

• Cover you if you are disabled and cannot perform your original occupation, even if you might be able to work doing something else.
• Pay a residual, reduced benefit if you return to work part-time.
• Pay benefits for at least five years. Ideally, your policy will cover you until age 65 when you will receive Social Security but such lifetime policies are expensive.
• Have a short "elimination period." Though it will be less expensive to buy a policy that doesn't distribute benefits until a year after the onset of your disability, your savings will probably be over-extended long before a year is up.
• Remain "non-cancelable " and guaranteed renewable so your premiums will not be increased and your coverage cancelled, even if you develop further health problems.
• Include a cost of living adjustment that keeps up with inflation.
• Cover disabilities due to both accidents and illness and doesn't restrict benefits for mental and nervous conditions.

How to shop
Decide how much coverage you need. What would your living expenses be if you were disabled for three months or longer? Consider how much coverage can you get. Most disability plans cover a maximum of 60% to 70% of gross income.

Compare price. Though most policies will cost about 2%-5% of your annual income, price will vary widely. Expect to pay more if you work in a risky environment or if you are buying a plan that provides a larger monthly benefit.

Questions to ask
Many employers offer a group disability policy to their employees. Though these policies are generally less expensive and often don't require medical history information, they usually cannot be transferred to a new employer. Make sure to find out about:

• What coverage is available?
• What are the waiting and benefit periods?
• Will your employer pay the premium or will you?
• Can you buy additional coverage beyond what your employer provides?
• Are there residual benefits if you come back to work part-time?
• What is considered a disability?
• Will the premiums remain constant or increase with age?

If you don't have access to a group policy, you may want to consider buying a personal policy, most of which are non-cancelable and guaranteed renewable. Before signing, be sure to ask:

• What is the rating, age and size of the company?
• What are the waiting periods? (immediately, 30 days, 60 days, longer?)
• What are the benefit periods? 5 years? Until age 65?
• What are the renewal guarantees?
• What is considered a disability?
• Is partial or residual coverage included in the base premium or is there an additional cost?
• What happens when I stop working or reach age 65?