The risk
The Social Security Administration estimates that roughly one in four of today's twenty-year-olds will be disabled for a stretch before reaching retirement age. The causes are mostly not accidents but back problems, cancer, heart disease, depression and complicated pregnancies. A thirty-year-old earning $60,000 has something like $2 million of future pay ahead, and nothing else that person owns approaches the figure.
What may already cover you
Short-term disability replaces part of your pay for three to six months. Long-term disability is the one that matters, and employer group plans usually replace fifty to sixty percent of base salary after a waiting period. Check three things in the plan booklet: whether bonuses and commissions count, whether there is a monthly cap, and who pays the premium. If your employer pays it, the benefits are taxable income. If you pay with after-tax dollars, they arrive tax-free. Group coverage also ends when the job does. Social Security disability is a last resort: it requires that you be unable to do any substantial work for at least a year, most first applications are denied, and the average payment is modest.
Reading a policy
- The definition of disability is the heart of it. Own-occupation coverage pays if you cannot do your job, while any-occupation coverage pays only if you cannot do any job you are reasonably suited for.
- The elimination period is the wait before benefits start, and ninety days is the standard choice, which your emergency fund must cover.
- The benefit period should run to sixty-five or later, because a policy that pays for two or five years does not cover the catastrophe you are insuring against.
- A policy that is non-cancelable and guaranteed renewable cannot have its price raised or its terms changed as long as you pay.
- Useful riders include residual benefits for partial disability, a cost-of-living adjustment, and a future purchase option that lets you add coverage as your pay rises without a new medical exam.
Cost and timing
Individual policies generally cost one to three percent of your income a year, depending on age, health, occupation and features. Buy while young and healthy, since premiums are based on your age at purchase and a later diagnosis can make you uninsurable. An independent broker who quotes several insurers is the usual way to shop.
Tip Answer every health question on the application completely. Insurers investigate at claim time, and an omission gives them grounds to cancel the policy when you need it most.
