If you wait until you're ill, you may be uninsurable
The best time to get disability insurance? Before you need it.
| Credit: (FOTOLIA)

The best time to get disability insurance? Before you need it.(FOTOLIA)Chronic pain, cancer treatment, severe depression—these are just a few of the virtually countless reasons you may not be able to show up to work for a significant period of time. Consider this statistic: A 20-year-old has a 30% chance of becoming disabled by the time he or she reaches retirement age. Needless to say, the financial consequences of a disability can be devastating. In 2001, more than one-fifth of bankruptcies in the United States occurred because the debtors (or their spouses) lost at least two weeks of income due to injury or illness.

While government programs such as Social Security provide disability benefits, the eligibility requirements are strict: Your disability must be expected to last for at least a year and the government must conclude that you are incapable of any gainful employment. Also, the benefits may fall well short of your lost income. A 40-year-old making $60,000 a year, for instance, can only expect about $1,700 a month from Social Security in the event of disability.

There is another way to guard against the worst-case scenario. Disability insurance can provide some financial security—and peace of mind—if youre unable to provide it yourself.

What is disability insurance?
Disability insurance, also known as disability income insurance, replaces a portion of your income—typically between 50% and 70%—if you are no longer able to work due to sickness or injury. (No insurer will agree to replace all of your predisability income, the rationale being that you would have little incentive to return to work.)"Your ability to earn an income is likely to be your largest financial asset," says Marvin Feldman, president and CEO of the Life and Health Insurance Foundation for Education in Arlington, Va. "It's worth protecting."

When do you need disability insurance?
The short answer: right now. "You want to buy it when you don't need it at all," says Larry Saffer, a registered financial planner and insurance agent in Plantation, Fla. If you wait until you are actually ill, you may be uninsurable. And policies are most affordable when you are young and healthy. Saffer recalls the case of a 34-year-old teacher who, at his recommendation, purchased a disability policy through the school where she worked. She nearly forgot that she had the coverage, since it cost just a few dollars out of each paycheck. But then a medical mistake during a routine outpatient procedure led to emergency colostomy surgery, eight days in the hospital, and several more operations to correct the error. She had to use a colostomy bag for more than a year and was unable to return to the classroom for close to two. Her disability insurance kept part of her salary coming in through it all. "She thought it was a waste of money initially," Saffer says. "But when she needed it, it was there."

Next Page: What kind of policy should you look for? [ pagebreak ]There are two main types of policies: noncancelable, in which both the premium and the benefits remain unchanged over the life of the policy; and guaranteed renewable, a substantially cheaper option with fixed benefits that allows the insurer to increase the premiums in some cases. The average annual premium for noncancelable policies is around $1,700, according to a 2006 Wall Street Journal report. For guaranteed renewable policies, its just over $500.

Every policy varies in its definition of what constitutes a disability, and when the benefits will begin. Some policies may limit coverage for mental health problems, for instance, while others might require that you be unable to perform any job, not just the occupation you were in when you became disabled. Depending on the premium, the waiting period before the payments start can range from 30 days to 6 months or more. Make sure your policy is broad enough for your needs.

Where can I get disability insurance?
Most employers offer some form of short-term sick leave or workers compensation, but many companies (especially larger ones) also offer long-term disability insurance through group health plans. This approach has its limitations, however. Employer-sponsored insurance typically is not portable (that is, you cant take it with you if you leave your job). Also, if your company pays the premiums, you will owe income tax on any benefits you receive.

The alternative is to purchase a policy through a private insurer. Coverage you buy on your own tends to be more flexible and usually covers a wider range of illnesses. If you do have access to an employer plan, but it is not comprehensive enough, you can also use a private policy to fill in the gaps. Expect to pay 2% to 3% of your annual income for private disability insurance.

Buyer beware
While disability insurance is almost always a good idea, its important to be prudent when shopping for a policy. As with any insurance policy, scrutinize the fine print concerning benefits and waiting periods. In these troubled economic times, its also especially important to research the insurer and determine whether the company is financially healthy and has a track record of honoring claims. Experts recommend consulting credit rating services such as Moodys and Standard & Poors for financial information, and state insurance departments to investigate complaints and regulatory actions. In recent years, instances of insurers denying disability claims or discontinuing benefits have led to numerous well-publicized appeals and lawsuits.