Hedge against disability

By Emily Lambert

Working adults have a 3% chance of becoming disabled before retirement age, compared with a 1% to 2% chance of dying. Yet only 27% of adults have private disability coverage, even though the disabled must still cover their own living expenses, as well as their families'. Don't count on Social Security disability to pay your bills. It can take years to start receiving benefits that average only $1,064 a month.

Many employers offer basic, low-cost group disability as a benefit or for an extra out-of-pocket premium. It's better than no coverage. But group policies often have offset provisions, meaning they pay you less once Social Security disability kicks in. Plus, group coverage might render you ineligible for an individual policy, which (unlike a group policy) will continue if you change jobs. Another advantage to buying an individual policy early is that you can renew coverage at your original rate even if your health deteriorates, notes Michael Horrow, an insurance and policyholder attorney at Donahue & Horrow in Los Angeles.

Disability policy literature can go on forever, but a few details are crucial. How is a "disability" defined? The best option pays if you're unable to perform your own occupation, or "own oc" in insurance lingo. A surgeon would be covered if she could no longer operate. The alternative, "any occupation" coverage, would only start paying if she became unable to act even as a Wal-Mart ( WMT) greeter. For obvious reasons, an "own oc" policy will cost more.

"It is absolutely worth the investment," says Horrow. Some group policies, he cautions, offer "own oc" coverage initially but after two or three years convert to "any oc."

The benefit period is crucial, too. Some older policies last for life, but those are harder to buy now. Others cover you for only two or five years, or until age 65. Consider, also, paying extra for a cost-of-living rider. A $6,000 monthly payment might sound good now but not in a decade or two if unadjusted for inflation. Lastly, be aware of the tax implications. If you pay your premiums at work with pretax dollars, Uncle Sam may demand a cut of your benefits.

http://www.forbes.com/forbes/2011/0627/money-guide-11-insurance-life-disability-policies-buy-young_3.html