Illustration: Chelsea Miller
Retirement 6 min read

Disability Insurance

According to the Social Security Administration, there is a three in ten chance of a 20-year-old worker becoming disabled before he or she hits retirement. Disability insurance provides a safeguard against this risk by providing income until you get back on your feet or as long as you qualify for the payments.

Planning for the Future

Your employer may offer disability insurance at a group rate or at no cost to you. You may also be eligible for coverage through your spouse's or partner's employer, and vice versa. Either way, a group plan is usually the more economical solution.

Individual policies, which you might buy if your employer doesn't offer a plan, tend to be more expensive. However, you may want to consider purchasing a policy if there's no plan at work, or the one that is available provides limited coverage.

Remember, though, that no policy will replace 100% of your employment income, and many policies don't duplicate what Workers' Compensation covers if you qualify for those payments.

How Benefits Work

Some disability policies pay a percentage of your monthly salary, usually between 50% and 70%, up to a cap, or limit. For instance, if you make $7,000 a month and your policy pays 60% of your income, you'll receive a disability check for $4,200. However, if the policy caps payments at $10,000, you won't receive more than $10,000 a month, no matter how high your salary is. Other policies pay a specific monthly benefit rather than a percentage of income.

Disability policies also offer varying periods of coverage. You may be able to buy insurance that provides income for a certain number of years, such as two or five, or until you reach a specific age, such as 65.

Whatever plan you choose, you should check with your tax adviser to see if your disability income will be taxable. Among the determining factors are whether you or your employer pays the premiums and if the payments are made with pretax or after-tax income.

What's a Disability?

Even if you become injured or ill, whether or not you'll receive disability benefits depends on who's paying you. That's because each policy sets the criteria for evaluating your claim that you're unable to work.

Whatever plan you choose, you should check with your tax adviser to see if your disability income will be taxable.

To collect Social Security disability, for example, you must be unable to earn more than a set amount, and your disability must be expected to last at least a year or to end in death. The federal government resets the earnings cap annually. For 2018, it's $1,180 per month. You can find information about this program at www.ssa.gov.

Disability policies issued by insurance companies apply different rules for determining benefits. Some, but not all, are more flexible than the coverage provided by Social Security.

One type of disability policy, called own-occupation, or "own-occ", will pay benefits if your condition prevents you from doing your own skilled work. So, if you're a doctor, you can start receiving benefits if you're unable to practice medicine, even if you're able to do other types of work.

Many other policies are a combination of own-occupation and any occupation. That is, for a period of time at the beginning of a disability, you must be unable to perform your own occupation to receive benefits. After that initial period ends, if you are still disabled, you must be unable to perform any occupation to continue to be eligible for benefits. In contrast, still other policies provide benefits only if you are unable to do any work at all.

While You Wait

It takes a while for disability benefits to kick in, often 60 or 90 days after you've been determined to be disabled. You can buy policies with shorter or longer periods. The longer the time, also known as the elimination period, the lower the cost of insurance.

Depending on the date the insurer uses as the start of an elimination period, a 90-day elimination period may translate into four months between the first day you're considered disabled and when you receive your first check. That's why it's essential to keep some of your cash in liquid accounts, so it's available in case of emergency.

If You're Self-Employed

If you're self-employed or own your own business, you can imagine the effect your disability might have on your livelihood, especially if your participation is so vital that day-to-day activities would be disrupted or the business would be forced to close.

Illustration: Cristi Cash

If your business isn't incorporated and you can't pay your bills, creditors may have the right to repossess your personal property and perhaps force you into bankruptcy.

In addition to the usual income-replacement insurance, you may want to buy business overhead expense insurance to cover normal operating expenses in case you are disabled. That way, your business will be able to pay bills and even maintain normal operations while you recover. By keeping your company solvent, you may also make it more attractive to buyers if you decide to sell.

Comparing Policies

If you're considering any policy, read it carefully to find out what it does and does not cover. Many policies exclude disabilities that are a result of drug abuse, attempted suicide, or criminal actions on your part, and most refuse to cover disabilities that result from a pre-existing condition.

In addition, the features of each plan vary, so check for the following as you compare policies:

The renewability feature describes the terms that apply for renewing your policy. While some guarantee you will be able to renew, others do not. Still others allow renewal only under certain conditions.

Policies that offer cost of living adjustments will increase benefits as the cost of living rises, which it is sure to do, over time. There is usually an extra fee for this provision.

Some plans allow you to waive the premium but remain covered either while you're receiving benefits, or after you've received them for a certain amount of time.

And since you may be partially disabled and lose some, but not all, of your salary, you may want to look for a policy that offers residual or partial disability, which would allow you to collect a portion of your benefits.

If you're serious about disability coverage, a good first step is to find a fee-only insurance consultant who can help you evaluate the options. It can be worth the cost to receive unbiased professional advice as you seek protection for you and your family.

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