Disability insurance

While life insurance can financially protect your family if you die, disability insurance can help protect you and your family if you are unable to work because of illness or injury. Most disability policies replace a percentage of your pretax salary, often 50% to 70%, with a cap, or limit on the amount you can receive each month.

Making choices

You can choose between a policy that covers you for a set period of time, such as one, two or five years, or one that lasts until you are eligible to retire. As with most insurance policies, the longer the coverage period, the more your premiums will be.

One thing you should anticipate is that it may take up to four months to start receiving the disability payments once you qualify for the coverage by being considered disabled. The waiting period, known as the elimination period, is typically about 90 days, and the first payment is made at the end of the month after that period ends. You can specify a shorter elimination period when you buy a policy, but that will increase the cost of the insurance.

Meeting the test

Your insurance company's definition of what it means to be disabled is likely to be rather strict, potentially making it harder to qualify for income payments than you anticipate. Some policies state, for example, that if you can work at any job, even one that pays much less than you were earning, you aren't disabled. More expensive options, called own-occupation policies, will pay benefits if you are unable to do the skilled work for which you have been trained.

Before buying a policy, you'll want to read it carefully to be sure you know what it does and does not cover. Many policies, for example, refuse to cover a disability that results from a pre-existing condition.

Sources of protection

If you're considering disability insurance, you may want to begin by investigating whether there's a policy available through your employer. Group policies tend to be less expensive than those you buy individually, though the drawback to this approach is that if you leave your current job, you probably won't continue to be covered by your former employer's plan. You can also search online to get a sense of what's available through other organizations to which you belong.

There is a safety net. You may qualify for Social Security disability coverage, though the standards are rather strict. Job-site injuries may make you eligible for workers' compensation. However, that income alone is unlikely to be enough to allow you to live as comfortably as you would like.

The bottom line here, as with other types of insurance, is that you'll want to weigh the likelihood of needing disability protection against the cost of that protection.