ASK KIM


Why You Need Disability Insurance

Kimberly Lankford

Even if your employer provides coverage for you, it might not be enough.



I have disability insurance at work. Is there any reason why I'd need to buy a policy on my own?

Perhaps. Having disability insurance at work is a great start. The policy can help if you get sick or injured and are unable to work. But your employer's coverage might not provide enough money to pay all of your bills.

Employers' disability insurance policies generally cover only 60% of your salary and cap monthly benefits at $5,000 to $10,000 -- up to $60,000 to $120,000 per year before taxes -- even if that is much less than 60% of your base income. And that 60% of income rarely includes commissions and bonuses, leaving many salespeople, stockbrokers and top executives with a lot less money than they're used to living on.

Find out exactly how much your employer's disability insurance policy would pay if you became disabled. If you wouldn't get enough to cover your monthly bills, then it's a good idea to get an individual policy to fill the gaps. You might want to start your search, though, by asking if your employer offers extra coverage if you pay it for yourself.

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An individual disability policy can increase your coverage, and you can keep it even after you leave that job. And if you pay the premiums on your own, then the benefits will not be taxed -- unlike disability insurance benefits from an employer-paid policy, which are generally taxable.

When shopping for your own disability insurance policy, look carefully at the definition of disability. This is the key phrase that determines under what circumstances the policy will pay. This definition can vary enormously. Some disability insurance policies will pay if you can't do your current job, even if you can do another job (called an "own-occupation" policy). Some will pay some benefits if you can't earn as much money as you could before the disability. And others will only pay if you can't do any job at all. If you have a highly specialized career -- such as a surgeon -- then it may be worthwhile to pay extra for an own-occupation policy.

Also check out the length of the benefits. Some pay for a few years, others until age 65, and a few will pay for your lifetime, which may be more coverage than you need if you already have a lot of retirement savings. Find out how the benefits will rise with inflation. And see if the policy offers "residual benefits," which will provide some payment if you become partially disabled and have to cut back on your hours.

For more information about shopping for disability insurance, see Long-Term Disability Income Protection, a brochure issued by the Consumer Federation of America and the American Council of Life Insurers.

Got a question? Ask Kim at askkim@kiplinger.com.




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