Disability Insurance

Offered by most employers and sold individually, disability insurance replaces some of the income lost when an individual is unable to work due to an illness or disability. While coverage does not specifically cover long term care or health expenses, you can use payments as you see fit. Employer or government offered policies maybe have limitations on the benefits available through these sources and sometimes the benefits won't be sufficient to meet your income replacement needs. You may need to consider a supplemental individual long term care disability policy to fully meet your needs.

There are two types of coverage: short term and long term coverage. Short term is often offered by employers and may provide income for a week up to a year or two depending upon the policy. Long term coverage kicks in after short term coverage ends for a predetermined period, usually two to five years or until the disabled person retires. This type is sometimes offered by employers and sold individually. Keep in mind that an employer’s policy might be very limited, could take some time before benefits begin, and ends when the employee changes jobs. There are also tax consequences: a payout from a work policy is subject to taxes while those from an individual policy are tax free.

Experts recommend the policy replaces at least 60 percent of take-home salary and ideally up to 80 percent, if affordable. 100 percent coverage is never offered because you would have no incentive to work if you were paid fully to stay at home.

Regardless of which type of policy you choose, be sure you understand the policy well. Make sure that the policy covers not just if you can work your own profession but if you cannot work at all or some agreeable combination. Verify the coverage time limit as well – is it for a few years or until retirement?

Finally, keep in mind that eligibility and premiums are determined based upon age, sex, income, health, use of tobacco products, and type of job. As with most insurance coverage, your age especially impacts the premium rate you’ll pay so it’s best to buy a policy at a young age and before health conditions appear.

Advantages Disadvantages
Replaces a predefined percentage of income while you are unable to work. Employer-sponsored coverage is generally available only while you’re employed by the company up to age 65, not after you’ve retired.
Individual may use funds for any purpose, including long term care costs. Because it replaces only a portion of your salary and may be subject to time limits, it is unlikely to cover all the long term costs one might incur while away from work.