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 ensure 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 do you need?
You should have enough 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 can not insure yourself
for more than you are currently earning. And of course, the larger the
payment you would receive, the larger the premium.
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 them and may want a higher level to cover the taxes.
Other issues
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.
Waiting period - 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 a
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. You may also wish to investigate whether any professional
organization you belong to offers these types of policies.
Summary
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.
