About 70% of Americans have life insurance, but only about 40% have disability insurance. The likelihood of becoming disabled, however, is greater than the risk of dying at every age prior to age 65. In fact, the chance that a 30-year-old will be disabled for more than three months before age 65 is one in two. Disability insurance is often overlooked as a needed form of protection, but as you can see the need is great.
Why you need it
Have you ever thought about how you'd get by if you couldn't work? How would you pay the mortgage, taxes, car payments, college tuition or other expenses? Federal Housing Administration statistics show that 46% of all mortgage defaults are due to disability. Many people find themselves in financial dire straits because they do not realize that the risk of disability is a serious one.
What it does
Disability Insurance works when you can't. Most individuals would be well served by applying for enough coverage to replace at least 60% of their earnings. By paying the premium with after tax dollars, your benefit will not to be subjected to income tax, which means that the benefit actually replaces 85-90% of your spendable income. In the case of a sudden injury or illness, you'll be able to pay bills and take care of your family.
What to look for in a policy
Insurance experts will tell you that one of the most important provisions to consider when purchasing income protection insurance is the definition of disability. It is critical that the benefit is triggered by the inability to perform the duties of your own occupation. Also, look out for policies which use a your "own occupation" definition of disability, for, say, the first two years which then shifts to a less liberal definition such as: "the inability to perform the duties of any occupation for which you are trained by education or experience."
Also, pay attention to what choices a policy may give you in regards to benefit durations (how long benefit payments will be made in the event of a disability, i.e. 5 years or to age 65) and benefit waiting periods (how long you must wait until the benefit begins). These will affect cost and will vary according to your current needs. If you are young, you may want to consider buying a policy that will provide benefits to the age of 65.
The benefit waiting period will determine how long you'll have to wait before receiving monthly benefits. Usually, your choices will vary from a little under a month (28 days), three months (90 days), or as much as six months (180 days). By choosing a longer waiting period you can save money. Choose the amount that best meets your needs.
Other important factors to consider are: residual benefits, which allow you to receive a partial benefit while attempting to come back to work full time, after being totally disabled; a benefit booster, which prevents cost of living increases from eroding your purchasing power; and guaranteed insurability which allows the purchase of additional monthly income protection without medical evidence of insurability.
Tip the odds in your favor
Recognize the risk of disability you face, but tip the odds in your favor. Your earning power is probably the most important resource your family has and you can protect it simply and inexpensively.