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What if you got sick or hurt and could not work for a long time – or ever again? Would you be able to pay your bills? Disability insurance is designed for just such an eventuality, but there are many things to consider before you buy.
First, look at your situation. How much income would you need to maintain a lifestyle you would be comfortable with? Take into consideration whether your needs would change over time. If your spouse is employed, how much of your expenses would that income cover? How flexible is your work situation – for example, if you could not do physical labor, are you qualified to do something less strenuous?
How much do you have in savings, and how long could you live before you found yourself in financial trouble? Experts suggest that you be able to pay your bills for several months without having to sell your home, break into your retirement investments, pile up credit card debt or borrow from other sources.
If you are employed, look at what kind of coverage, if any, is available through your employer. You probably have workers compensation coverage, but that only pays if your injury or illness is work-related. If you get sick or hurt off the job, work comp will not provide any benefit. And even if you can collect work comp, it may not be enough to meet your needs.
Your employer may offer disability coverage. If so, pay close attention to the kind of coverage, including how long it is before the coverage kicks in and how long the coverage lasts. Look closely at the amount of money the policy pays, because many employer-paid disability policies offer relatively low benefits. If your employer does not pay for the coverage, ask if they offer coverage that you can buy at lower rates than you would pay on the open market.
If you are self-employed, you have to provide your own work comp and disability coverage. Whether you are evaluating your employer plan or looking at coverage for yourself, there are some basics to consider.
There are two kinds of disability insurance: Short-term disability provides coverage after a short waiting period – usually within two weeks, and sometimes immediately – but coverage lasts only for a maximum of two years. Long-term disability has a longer waiting period, even as long as several months. But it also has longer coverage, from a few years to the rest of your life.
Policies can be non-cancelable or guaranteed renewable. Non-cancelable policies cannot by canceled by the insurer unless you don’t pay the premium, and premiums remain the same. Guaranteed renewable policies also cannot be canceled by the insurer, but the premium can be increased. There are several potential extras to disability coverage, including coverage with a cost-of-living adjustment, coverage that lets you return to work part-time, or coverage that waives your premium if you are disabled for a specific period of time.
Disability insurance premiums are based on your age, your gender, your health, your job and the amount of income you want to replace. In general, the more dangerous your job and the more income you want to replace, the more expensive the coverage will be. You can keep premiums lower by extending the waiting period or buying less coverage, but be careful not to leave yourself underprotected.
You should consider disability insurance as part of your overall plan to protect yourself and your loved ones. Your financial adviser or insurance broker can help you evaluate your needs and find a coverage that works best for you and your family.