Do You Need Disability Insurance?

Let's face it: Nobody likes to think about what life would look like should disability strike. But the reality is one third of all Americans between the ages 35 and 65 will become disabled for more than 90 days. One in seven workers will be disabled for more than five years. And while many people think that disabilities are typically caused by freak accidents, the majority of long-term absences are actually due to illnesses, such as cancer and heart disease. The loss of income can be so devastating that it forces some people to foreclose on their home or even declare bankruptcy.

Disability insurance replaces a portion of your income if you become disabled and are no longer able to work. A typical group plan offered by an employer will replace up to 60% of your salary. Supplemental plans and individual policies will often cover up to 70% or 80%. Benefits typically last for a set number of years (say five years) or until you reach retirement age. Benefits typically stop around retirement age since once you retire, you would no longer be dependent on the income you generated by working, anyway. If you pay the premium out-of-pocket — meaning your employer doesn't cover the tab — benefits are tax free.

Long term disability policies vary greatly. While some are iron-clad and pay benefits when you need them, others have more holes than a pasta strainer. Folks trying to save some money with a leaner plan may find it ultimately worthless. Typically, the cheaper plans have very strict definitions of disability, making it difficult to claim benefits over many years. Sadly, this is also true of some group plans.

Group Plans

Unless you're self employed, the first thing you should do is figure out if your employer provides long-term disability insurance in the first place. About half of mid- to large-sized firms offer benefits that last for at least five years. But even if you're lucky enough to have coverage, the plan may not meet all of your needs. So be prepared to take a good, hard look at what you've got.

As mentioned above, the typical group plan covers up to 60% of one's income. (This is offset by any other benefits you may receive from social security or worker's comp.) But the amount may actually be far less than that. That's because most group plans have a benefit cap of, say, $5,000 a month or $60,000 a year. Another surprise for many is that bonuses don't usually make it into the equation. A group plan will only insure your regular salary.

Another shortcoming: Most group policies limit the amount of time it will pay benefits if you can't perform your job duties to just two years. After that, you'll need to prove you can't hold down any job. Not only does this keep costs down for your employer, but the idea is that you can get new job training during those initial two years that you receive benefits.

Individual Plans

If you are self-employed or not covered by your employer, it clearly makes sense to consider purchasing an individual plan. But even if you are covered at work you may want to consider supplementing what you've got: After all, you probably can't afford to live on just 60% of your salary. An individual plan will allow you to insure another 10% to 20% of your income. And in some cases, you may even be able to get individual coverage for a six-figure salary and a bonus — something you'll never get with a group plan.

If you can afford it, consider opting out of an employer plan and purchasing a more comprehensive individual policy on your own. Why spend the extra money? An individual policy stays with you when you switch jobs and you can sue if the insurance company denies or delays benefits. And unlike group policies, the amount that you receive is also not offset by any other benefits, such as Social Security, that you may receive.

Read more: Do You Need Disability Insurance? - Personal Finance - Insurance - SmartMoney.com http://www.smartmoney.com/personal-finance/insurance/do-you-need-disability-insurance-17318/#ixzz1KYY8FIPc