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The Importance of Having Separate Disability Coverage

If you've never taken notice of disability coverage before, it's time to start.

Disability insurance protects your ability to earn an income. It provides money to pay your rent, mortgage and basic living expenses if you are injured or sick for an extended period. It is called disability insurance or disability income protection but think of it as income replacement when you are sick or hurt and cannot work. At any age, you are about six times more likely to become disabled for some period of time than to die.

Think your employer's coverage is enough? Think again. You may have whatever sick leave you have coming, and then if an employer offers short-term disability coverage, it generally doesn't last more than 12 weeks. There are employers that offer long-term disability coverage, but if you've never checked the terms of that coverage, you should. It never hurts to consult a financial advisor with expertise in this subject, such as a CERTIFIED FINANCIAL PLANNER™ professional.

The basic components of long-term disability coverage are:

Monthly benefits : Depending on your income, long-term disability insurance is generally structured to pay 50 percent to 70 percent of your income up to age 67 or your normal retirement age. Research if the policy you're buying offers you the chance to buy more insurance as your income increases in future years.

Benefit term : For each disabling incident, your policy may pay benefits for a certain period – two or five years, or until retirement. It's all about how your policy is constructed. Some policies even pay for life if you purchase this benefit and you are disabled prior to age 60.

Buying younger is generally cheaper: Like health and life insurance, the younger you buy, the less you'll pay. Occupation enters into the picture because high-risk jobs (where disability is a greater work-related factor) tend to draw more claims. Like health insurance, the company will consider your medical history and your lifestyle, including your weight, pre-existing conditions and whether or not you smoke.

Premium cost : The premium will depend on am array of factors and vary dramatically. Such things as age and gender (women pay more for disability insurance because they tend to live longer and may work longer) will be considered.

Non-cancellation provisions : Make sure that once you're approved, the insurer can't cut your coverage unless it decides to stop writing coverage for everyone in your job class. It should also state that the insurer can't raise your rates.

Guaranteed renewable: Like the category above, this means your insurance can't be canceled,. The insurer can, however, raise the rates for everyone in the category.

Own occupation vs. any occupation: If you have “own occupation” coverage, it is intended to go into effect if you can't perform the functions of your current job. “Any occupation” coverage pays only if you can't work at any job where you've been reasonably trained to do the tasks. For example, if you're working a desk job, you could easily be transferred to a receptionist's job or some other function within the company that you can now do or is your former position. That could significantly interfere with your recovery time, so consider the benefits and specify “own occupation” coverage.

Elimination period: Like a deductible in home, health or car insurance, the elimination period is a big cost determinant in disability coverage. Most policies will start paying after 30 days after you've been declared disabled. But if you specify an elimination period of 60, 90 or 120 days, your premium will be lower. An important point about the 30-day elimination period: the benefits don't start accumulating until you've been laid up a month after the ruling date and you won't get your payment until a month after that. Be very clear with your insurer when you'll get your first check based on what elimination period you choose, and funnel the money you'll need in the meantime to your emergency fund.

Partial payments/Residual benefits : Some policies may offer you 'residual benefits' or a partial payment if you're less than 100 percent disabled, but still can't perform all the duties of your job.

If thinking about self-employment : You'll likely need disability coverage. But the time to buy is while you're still in your current job. Why? You won't be able to prove your income once self-employed, so consider obtaining your desired coverage before you leave.

December 2009 – This column was authored in cooperation with Financial Planning Association.

This material is for informational purposes only and is not intended to provide specific advice or recommendations to any individual or group. Before making any financial decisions or commitments, please consult with your financial professional.

Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.