Private Disability Insurance Can Cover You if Your Employer Doesn't

By Elliot Raphaelson

According to a recent article in Money magazine, chances are almost 20 percent that an employee will be disabled for at least a year sometime during his or her working life. Meanwhile, corporations are reducing the percentage of employees who are covered with long-term disability insurance. Apparently, only 48 percent of U.S. companies offered this coverage in 2009. These policies typically cover only part of your base salary, and your benefits will be taxable.

Disability benefits are also available through Social Security for those who have worked a minimum of five of the last 10 years previous to becoming disabled. If you are eligible for Social Security disability payments, it is likely that they would be deducted from the benefits of any corporate policy that covers you.

You should not depend on Social Security disability for many reasons. First of all, to qualify, you must be unable to work in any substantial job. (The Social Security requirement for consideration is: "Your condition must interfere with basic work-related activities.") You will not qualify for benefits for at least five months after the even that disables you. And you will not be approved for benefits unless a doctor certifies that your disability will last at least a year. Approximately two-thirds of all who apply for Social Security disability benefits are initially turned down, and appeals are time-consuming and not necessarily successful.

If your employer does not offer disability coverage (or offer inadequate coverage), you have the option of purchasing insurance on your own. Unfortunately, individual policies are generally expensive, and terms and conditions vary greatly. The cost will depend on your age, health, sex, state of residence, occupation and smoking habits -- and will vary from insurer to insurer. The safer your occupation, the lower the costs and the higher the benefits. Self-employed people are also eligible for individual policies. Women are generally charged more than men because they make more claims on average. Some companies do have unisex rates, and some states require unisex pricing.

The first essential step is to determine the amount of monthly income you require. Then you can consider the types of policies that will provide the most value for you.

If you have a limited budget, you can consider an annually renewable disability income policy. The premium will be low initially and will increase a little each year. A traditional disability policy is more expensive initially, but the price is fixed for the entire term of the policy.

Some policies are "non-cancellable and guaranteed renewable." This means there can be no change in premium or your monthly benefits up to a specified age. Other policies are "guaranteed renewable." This means that policy terms can change with state approval. Guaranteed renewable policies are generally 10 percent to 20 percent cheaper than non-cancellable policies for this reason.

You can select different terms. Policies that protect you for only two to five years will naturally be less expensive than policies that last until age 65 -- when you could be eligible for Social Security income and/or an employer pension. Some insurers offer lifetime protection, but, as you would expect, this costs more.

It is crucial for you to understand the definition of "disabled" in your policy. Some policies specify that you are disabled if you can no longer perform the functions of your current occupation, but they will allow you to get another job and still be eligible for benefits. Other policies will pay only if you can't work at any occupation that fits your education, experience and training. In this situation, you are at the mercy of the insurance company, which has the discretion to determine whether you are disabled, even if you are not working.

An income-replacement policy insures your income. If you can't work at all, you receive your full benefit. If you work part-time, the policy pays the difference between your earnings and the full insured benefit.

Selecting an appropriate individual policy is complex. You need a competent insurance agent. A good site is nahu.org, which can refer you to licensed agents who can comparison-shop for you among many companies offering disability insurance.

Personal Finance - Private Disability Insurance Can Cover You if Your Employer Doesn't