Disability Insurance

What it protects against

Loss of income while an insured is unable to work.

How it works

When an insured becomes unable to work, and after the waiting period stipulated in the policy, the insurer makes periodic payments to an insured that represent a percentage of his or her working income. Often that figure is 60%. Short-term disability insurance covers periods from two weeks to two years, while long-term disability insurance usually will pay for up to five years or until age 65. Special policies continue contributions to retirement plans.

Who needs it

Anyone whose financial situation would deteriorate significantly by being out of work. A worker's chance of becoming disabled is 2 to 3.5 times greater than dying. One in three working Americans will be disabled for 90 days or more before age 65, according to the Society of Actuaries. Social Security benefits are limited to disabilities expected to last at least 12 months or end in death, and those who qualify must be unable to perform any type of work. Employers must provide workers' compensation insurance, but nearly 60% of injuries happen off the job. Benefits in employer-sponsored disability plans may not be as generous as those in individual policies, so be sure to check your employer's plan.

Who may not need it

People with substantial assets may not need disability insurance. Financial planners recommend a cash fund that can cover at least six months of expenses in case of emergency.

When to buy it

The need for disability insurance is statistically greatest before age 50, but the consequences of losing one's income can be significant at any time in life.

How to pay for it

Periodic premiums for individual policies.

Terms to Know

• Cost-of-Living Adjustment (COLA)
  Automatic adjustment applied to Social Security retirement payments when the consumer price index increases at a rate of at least 3%, the first quarter of one year to the first quarter of the next year.
• Guaranteed Insurability Option
  See Future Purchase Option.
• Guaranteed Renewable
  A policy provision in many products which guarantees the policyowner the right to renew coverage at every policy anniversary date. The company does not have the right to cancel coverage except for non-payment of premiums by the policyowner; however, the company can raise rates if they choose.
• Noncancellable
  Contract terms including costs can never be changed.
• Own Occupation
  Insurance contract provision that allows policyholders to collect benefits if they can no longer work in their own occupation.
• Residual Benefit
  In disability insurance, a benefit paid when you suffer a loss of income due to a covered disability or if loss of income persists. This benefit is based on a formula specified in your policy and it is generally a percentage of the full benefit. It may be paid up to the maximum benefit period.
• Waiting Period
  See elimination period.