By Joseph Destefano

Disability insurance protects your income the way other insurance policies protect your car or your home. Unlike medical insurance which (hopefully) covers the bills, disability insurance helps cover your income if you become unable to work because of illness or accident.

Disability insurance comes in a variety of sizes and shapes. Some policies take a percentage of each payment-you are technically "paying back" yourself in the event you cannot work. Some options enable you to increase the monthly premium and thus, increase the potential monthly payout, if you end up needing the policy. Be sure that policy features are comparable when comparing the cost. But while price is important it should not be your sole consideration.

Types of Disability Insurance

• Short-Term Disability-This type of insurance typically has an elimination period (the time you wait between placing your claim and receiving your first check) of 0 to 20 days. The benefit period may lasts last less than a year, and in some cases, up to 2 or 3 years.
• Long-Term Disability-This type of insurance usually has an elimination period of one or two weeks to several months. The benefit period can be preset anywhere from a few years to the rest of your life.

Short-term disability insurance is a viable option if you are two years or less away from age 65 when you will qualify for Social Security disability protection. Otherwise long-term disability insurance might be the better choice.

Types of Policies

• Noncancelable-This type of insurance policy guarantees the same premium and the same benefit amount every year for the life of the policy. Actually, it can be cancelled but only if you fail to pay the premiums. This is generally the most expensive policy.
• Guaranteed Renewable-This type of insurance policy guarantees the same benefits every year. Premiums can be raised but only if every policyholder with the same rating receives the same increase.
• Conditional Renewable-In this type of disability insurance policy, the insurance company has complete discretion. It can change the premiums or the benefits or both at will.

Options

Adding options to your disability insurance will increase the amount of your premium. But carefully selecting the right options in the beginning may enhance the value of your policy considerably.

• Cost of Living Adjustment (COLA)-This automatically increases your benefits on a sliding scale tied to the Consumer Price Index. A COLA option always costs more. However, it may be worth the extra premium.
• Partial Benefits (or Partial Disability)-This allows you to work part-time while receiving partial benefits. Some insurance companies include this as a standard feature if you sign up for another policy.
• Premium Refund-In this type of policy, if no claims are made within a specified period of time, the insurer must refund a portion of the premiums already paid.
• Premium Waiver-In this policy type, you can stop paying premiums if your disability lasts 90 days or more.

Shop Around

The agent that handles your home/life/car insurance can sell you a disability insurance policy or direct you to someone who can. Ask friends, family, coworkers, and neighbors whether they have disability policies, and if they can recommend one to you.

What to Look For

Some companies will pay benefits if you are unable to perform the duties of the occupation you had when the disability occurred. For example, if you are a surgeon and are unable to perform an operation because of an injury that makes your hand shake. You can't perform operations with a shaky hand, but you could perform other types of jobs.

Other disability insurance plans will pay benefits only if you are unable to perform the duties of any occupation. Still others will pay you for two or three years if you are unable to perform the duties of your normal occupation and thereafter only if you can't work at all.

You can select an accident-only policy or an accident/illness policy. An accident-only policy costs less but may provide inadequate protection.

Sensible Savings

You can reduce the premiums of your disability insurance in several ways:

• Replace less income: For example, you can choose to replace anywhere from 50 percent to 70 percent of your income. The less you choose to replace, the lower your premium will be. Bear in mind that if you pay the premiums yourself the benefits are not taxable.
• Wait longer for benefits to start: If you can wait 90 days or more before receiving your first disability check you can get a break on the premiums.
• Set Limits on Coverage: Lifetime coverage is, of course, the most desirable but it is more expensive. Setting a term limit that coincides with Social Security coverage will save you money.

Disability Insurance is an important tool for maintaining your finances. Put the effort in now to find a policy that fits your needs (now, and in the future) and enjoy the peace of mind that preparedness can bring.