The key to determining your needs is to assess how much you would be required to spend during each week or month that you would be unable to earn your normal pay.
Your best defense against a financial catastrophe brought on by long-term illness or injury may be the purchase of a disability income insurance policy with enough coverage to compensate for your lost wages. Disability insurance provides you with cash that you can use for paying your mortgage or rent, buying groceries and meeting other ongoing living expenses.
Putting Policies in Perspective
For most people, there are two main forms of disability income insurance to consider: employer-sponsored policies (called "group" policies) and private insurance policies. Group policies are relatively inexpensive and generally remain in effect for as long as the individual remains with the employer. But there are often significant limits on the benefits provided by these policies, so it's important to determine whether coverage is adequate for your needs.
Private insurance policies, paid for by individuals, typically are more expensive than group policies but may also provide a higher level of coverage. In certain instances, those with a group policy may want to consider purchasing a private policy to fill in the income gaps frequently associated with group-only coverage.
How Much Disability Income Insurance Do You Need?
The key to determining your needs is to assess how much you would be required to spend during each week or month that you would be unable to earn your normal pay. For example, if you would need 80% of your pretax earnings but your group policy would only pay an amount equal to 60%, then you may need additional coverage.
The way in which an insurance policy defines disability can determine your eligibility to receive benefits. The following is a quick overview of three basic definitions:
- Own-occupation. The most comprehensive definition of disability, it states that you are unable to perform the duties of the occupation you were performing at the time of the disability.
- Income replacement. Policies with income replacement coverage define disability as sickness or injury that doesn't allow you to perform the duties of your occupation and typically stipulates that you are not currently engaged in any other occupation.
- Gainful occupation. These policies define disability as the inability to perform the duties of your occupation or any occupation that you are considered to be reasonably qualified for by way of your education, skills or training.
A qualified insurance professional can help you assess your need for disability income insurance and find a policy that is most appropriate for you.
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© 2011 McGraw-Hill Financial Communications. All rights reserved.
June 2011 - This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Hausman Advisors, LLC, a local member of FPA.