Q&As: Disability Insurance

Q I am a 29-year-old single female making $50,000 a year, and I have recently enlisted the services of a financial planner. My job provides long-term disability insurance (67% of my salary) as a benefit, but the planner thinks I need more. Is it really necessary?

A It's always good to be a little suspicious when someone is trying to sell you more insurance. But disability insurance is one product that typically is undersold, if anything; far fewer of us have it than need it.

At first glance, that 67% benefit seems pretty generous; disability insurance usually covers only 50% to 60% of your salary. Insurers generally don't want to write coverage for more than that because they're worried you'll prefer the daytime soaps to working for a living.

But if your employer is paying the full premium (in other words, if you don't contribute through payroll deductions), then any disability payments you get would be taxable--which could reduce the benefit considerably. Depending on your tax bracket, you could wind up trying to live on as little as half of what you're making now. If your employer's current policy doesn't have an inflation rider, you might have to subsist on that amount for the rest of your life--probably not a pleasant thought. Or your policy may end when you're 65; if the benefits don't leave you much room to save for retirement, you'd be in even worse shape then.

A separate policy, paid for by you, could give you tax-free income that would supplement your existing coverage. If properly designed, the policy could also become your main disability insurance policy if you decide to change jobs. That's another disadvantage of employer-paid disability insurance--it's generally not portable.

If your planner thinks you can qualify--people in certain occupations have a tough time getting coverage--then it's definitely worth exploring. Disability insurance is a complicated matter, with many variables to consider. It would be smart to get quotes from a few companies and compare their coverage; to help you shop, check out Silver Lake Publishing's "How to Insure Your Income" ($12.95). Be sure to look for a policy that can be expanded to provide up to 60% of your income should you change jobs.

Our ability to earn money is our most important asset, yet too few of us have insurance to protect it. Social Security provides benefits only for the most severely disabled, and workers' compensation programs cover you only if your disability is job-related. A few states, including California and New York, have benefits for non-job-related disabilities, but the help is short-term--typically no more than six months to a year.

Disability insurance is particularly important when you don't have a spouse or partner whose income can tide you over through unemployment caused by accident or illness. It may be less important to you if you have significant savings, or if you don't mind risking a significant drop in your standard of living. For the great majority of us who aren't in either camp, disability insurance is usually a smart buy.


Q: In a recent column, you answered a letter from a 29-year-old single female earning $50,000 per year who was concerned about long-term disability insurance. In your response, you failed to address the disability insurance provided by Social Security, which would start six months after the onset of the disability. This is a very important consideration and might be just what she needs to cover her needs when combined with the 67% of salary from the employer-provided insurance.

A: She shouldn't count on Social Security disability, and neither should anyone else.

As I said in that column, Social Security provides benefits only for the most severely disabled, and it's tough to qualify. Ask anyone who's tried. Only about 1 out of 3 who apply end up getting any benefits.

That's because Social Security disability requires you to be so bad off that you can't perform any job. Read that again--any job. That includes selling tickets, flipping hamburgers or (shudder) telemarketing.

An individual disability policy, on the other hand, can be designed so that it will pay benefits if you simply can't perform your current job. That's a huge difference, especially for the highly skilled.

Such "own occupation" policies can be expensive, which is why many people buy a policy that provides coverage for two years if they can't perform their current job, after which the policy switches to "any occupation," meaning they then only get benefits if they can't perform any job.

Disability insurance is complicated, which is why I recommend picking up a copy of "How to Insure Your Income" (Silver Lake Publishing), talking to some savvy insurance agents familiar with disability and shopping around for price and features.