Judy Owen, Contributor, Forbes Magazine
If you don’t have a policy through work or if you need to supplement the one you have, here are some guidelines to consider:
Do you have short-term disability insurance? If not, choose an elimination period that matches the size of your emergency fund. The elimination period is how long you’d have to go before the long term disability coverage kicks in and is typically about 90 days. If you don’t have 90 days worth of savings, you might want to choose a lower elimination period. On the other hand, if you have more savings, a longer elimination period will reduce your premiums.
Do you work in a highly compensated field?If so, you may want to choose an own-occupation policy that pays benefits if your disability prevents you from working in your own occupation even if you can work in another job. These policies are expensive but can make sense if your income is high enough to afford the premiums and to be worth the special protection.
How much coverage do you need? Start by looking at your expenses and think about how some of them might change if you weren’t working. Keep in mind that the benefits from a policy you purchase won’t be taxable and that companies generally won’t insure you for more than 70-80% of your income.
How long do you need the coverage? Make sure the benefits last until you can retire and that the policy is non-cancelable and guaranteed renewable as long as you pay your premiums on time. You may also want a future increase option that allows you to increase the coverage with your income regardless of health changes and a cost-of-living adjustment for your benefits to grow with inflation, especially if you’re young.
Consider a social insurance offset to reduce the cost. This feature reduces your benefits by whatever you’re able to collect from programs like Social Security and workers’ compensation. While the extra income would be nice, it’s probably not worth paying more for benefits you don’t really need.
Shop around. Once you know what features you’re looking for, get quotes from for the best price from multiple carriers since insurers have different ways of rating various occupations and health conditions.
Don’t forget the legal side. Insurance isn’t the only thing you’ll need if you’re incapacitated. Get legal documents like a durable power of attorney and advance health care directive in place before you need them.
Disability doesn’t get the attention of other financial issues like debt, retirement and college expenses or even other types of insurance like health, life, and long term care. Perhaps it’s because the cost is high for something we hope we’ll never need. But the only thing worse than paying for it and not needing it is not paying for it and needing it.