Having disability insurance is almost a necessity, especially for younger people, for those without many other assets and for those with families that are dependent on a breadwinner's income.
Your overall financial strategy should probably include a disability insurance policy. These policies give you an income if you become disabled and are unable to work. They “insure” your earning power. Most disabilities arise from a medical condition. Sometimes, they are associated with aging, but often the medical problem is caused by an accident or some other unforeseen problem. It makes sense to be protected.
How much disability insurance do you need?
You should have enough coverage to enable you to have a decent lifestyle if you could not work. You should determine how much you are currently spending and what it would take to just get by. You will probably want to be insured for an amount between those two levels. You can also take into account any other sources of potential income, like investments. Policies are offered on a "dollars per month" basis and you usually cannot insure yourself for more than you are currently earning. And of course, the larger the payment you would receive from the policy, the larger the premium you will pay.
Proceeds from a disability policy are generally tax free if you pay the premiums. However, if your employer provides coverage, you will have to pay tax on the benefit payments and may want a higher level to cover the taxes.
Other factors to consider
Definition of disability
You should examine the policy's definition of disability. Some policies ("own occupation") provide benefits if you cannot perform the work you usually do while others provide benefits only if you cannot perform a job that you are reasonably trained to perform. "Own occupation" policies are usually more expensive and may not be worth the extra premiums if there are other jobs you could perform easily that would provide a similar level of income and that you would find rewarding.
Guaranteed renewable or non-cancelable
These words are important. They both mean that you cannot be dropped because of poor health. However, guaranteed renewable usually does not mean the insurance company cannot raise its rates. Make sure to read the terms of the policy carefully.
This represents the time you must wait after you are disabled and before you can start getting benefits. Many policies offer different waiting periods from 30 days to a year. The shorter the wait, the higher the premium. If you have other assets you could use for living expenses for a period, you may want to consider the longer waiting period with the lower premium.
Insurance company financial status
Be sure to check out the insurer. While there may be some form of state insurance fund protection, if your insurance company has financial difficulties, it may create some hardships for you. You can often find insurance ratings at your library or on the Internet. You can also ask the insurance agent for a report from an insurance company ratings agency.
Getting disability insurance
Most large companies offer disability insurance as part of their benefits package. If you work for a smaller company or are self-employed, you may need to find your own policy. You may also wish to investigate whether any professional organization you belong to offers these types of policies.
Having disability insurance is almost a necessity, especially for younger people, for those without many other assets and for those with families that are dependent on a breadwinner's income. The good news is that disability insurance is readily available from many sources.
Determine how much and what kind you need. Check your employer's benefits program for availability. Make sure you have the protection you need.