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What is Disability Insurance?
| Disability
insurance provides you with an income if illness or injury
prevents you from being able to work for an extended period of time.
It is an important but often overlooked form of insurance.
There are other possible sources of
income if you are disabled. Social Security provides protection, but
only to those who are severely disabled and unable to work at all;
workers’ compensation provides benefits if the illness or injury is
work-related; civil service disability covers federal or state
government workers; and automobile insurance may pay benefits if the
disability results from an automobile accident. But these sources are
limited.
Some employers offer short- and
long-term disability coverage. If you are self-employed, you can buy
individual disability income insurance policies. Generally:
 | Monthly benefits are usually 60
percent of your income at the time of purchase, although
cost-of-living adjustments may be available.
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| If you pay the premiums for an
individual disability policy, payments you receive under the policy
are not subject to income tax. If your employer has paid some or all
of the premiums under a group disability policy, some or all of the
benefits may be taxable. |
Whether you are an employer shopping
for a group disability policy or someone thinking of purchasing
disability income insurance, you will need to evaluate different
policies. Here are some things to look for:
| Some policies pay benefits only if
someone is unable to perform the duties of their customary
occupation, while others pay only if the person can engage in no
gainful employment at all. Make sure that you know the insurer’s
definition of disability.
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| Some policies pay only for
accidents, but it’s important to be insured for illness, too. Be
sure, as you evaluate policies, that both accident and illness are
covered.
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| Benefits may begin anywhere from
one month to six months or more after the onset of disability. A
later starting date can keep your premiums down. But remember, if
your policy only starts to pay (for example) three months after the
disability begins, you may lose a considerable amount of income.
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| Benefits may be payable for a
period ranging anywhere from one year to a lifetime. Since
disability benefits replace income, most people do not need benefits
beyond their working years. But it’s generally wise to insure at
least until age 65 since a lengthy disability threatens financial
security much more than a short disability. |
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