Weigh the Risk of Disability

One potentially enormous cost of an illness or accident isn't for medical care: It's the loss of income if you are unable to work. Yet many people neglect to protect themselves from that risk, by obtaining disability insurance.

People tend to underestimate the risk of becoming disabled. Almost three in 10 of today's 20-year-olds will become disabled before age 67, according to the Social Security Administration. Contrary to popular belief, most disabilities are not the result of accidents, but of illnesses including heart disease and cancer.

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Yet less than a third of workers in private industry have disability insurance, according to the Bureau of Labor Statistics. "Too many people don't have any disability insurance, or they don't have enough," says Matt Tassey, past chairman of the Life and Health Insurance Foundation for Education.

A majority of those who do have coverage, receive it as an employee benefit. (Disability insurance shouldn't be confused with state-mandated worker's compensation, which covers you only for job-related injuries.)

Employer-provided disability insurance generally replaces up to 50% or 60% of your salary if you can't work because of a covered injury or illness. It covers only one's salary: bonuses and commissions or tips aren't included.

Short-term disability policies often cover from three to six months; long-term disability policies often cover periods of six months to several years or more. Long-term policies typically terminate no later than age 65.

Weigh 'Voluntary' Coverage

While employer-paid coverage is more common, even "voluntary" coverage you pay for through payroll deduction can be a good deal. Voluntary disability-insurance policies are about 20% less expensive on average than similar amounts of coverage purchased privately outside the workplace.

But note that employer-paid and voluntary policies may have narrow definitions of disability, such as the inability to perform "any occupation." They also tend not to be portable from one employer to another, although some voluntary policies are an exception.

Many voluntary disability policies are of the "guaranteed renewable" type, meaning their premiums can go up each year.

Buying on Your Own

Individual disability policies are often purchased by professionals from agents or brokers. Your age and health history factor into the premium you are charged. You can be denied coverage for pre-existing medical conditions.

One advantage of individual policies is that they often replace a greater share of income than group policies -- up to 75%. They also can have more liberal "own occupation" definitions of disability. If you are a surgeon, for example, you can collect if you can still practice medicine but are no longer able to do surgery.

You can take the policy from job to job. Many individual disability policies are "non-cancellable," which means the cost can't increase after issue and your coverage can't be dropped as long as you pay premiums on time.

Some tips: Don't confuse disability coverage with accident insurance, which is much less useful. Also, if presented with a choice of short-term disability and long-term disability policies and you can't afford both, choose the long-term coverage to insure against the greater hardship, which is the inability to return to work for years, experts say. (New York, New Jersey, Hawaii, California and Rhode Island mandate employer- or state-funded short-term disability coverage.)

When evaluating policies, compare definitions of disability, excluded conditions, waiting periods before benefits are paid (usually 90 days to a year for long-term policies), and maximum benefit periods. Save money by extending the waiting period.

With individual plans, the price isn't final until medical tests and questionnaires have been reviewed by the insurer.