When to Get Disability Insurance

Adam Voorhes

If you rely on income from a job, financial advisers recommend that you have disability insurance.

At age 54, Michael Long was running 100 miles a month in the mountains around his home in Sherman Oaks, Calif. "I was an adrenaline junkie," Long recalls.

To have time for his active life, he worked as an independent contractor. He had private health and life insurance, but "never thought about disability insurance."

Then, just after his 55th birthday, Long was diagnosed with ALS, also known as Lou Gehrig's disease, which slowly causes paralysis.

Now that he is no longer working, Long faces considerable financial challenges: He has a host of new expenses, such as personal care assistance to help with daily activities.

Most Americans rate their chances of suffering a disability during their working lives at about 1 in 50 or more. But, in fact, 1 in 8 will become disabled for five years or more during their career. And the risk increases dramatically with age: People 50 or older account for 59 percent of disability claims.

That's why experts say disability insurance is critical for everyone who relies on income from a job. And if you're among the roughly one-third of Americans who get coverage through their employers, don't assume you've got the protection you need. Those policies have become leaner over the years.

Workplace plans generally include two policies: The first is short-term disability insurance, which typically covers only 60 to 70 percent of your salary, with a cap of $1,000 a week, if you miss work due to illness or injury for up to three months. After that long-term disability kicks in, and it typically pays 60 to 67 percent of your salary up to caps of $5,000 or $10,000 per month, until you turn 65.

But these payments may be calculated on base salary only, without commissions or bonuses—and the payments may be taxable. If you're looking to buy your own coverage, forget about short-term policies. You're better off putting the money into emergency savings, experts say.

If you've got a long-term disability plan from your employer, you may have the option of buying additional coverage through it. But don't. Buy your own policy independently. That way, you can keep it if you leave your job and avoid paying a higher premium to start a new policy at an older age. Plus, your benefits will be tax-free if you ever make a claim.

None of that peace of mind will come cheap, however. Once you're over 50, long-term insurance costs about 4 percent of annual income. Let's say you're 50 and earn $50,000 a year; you'll pay $2,000 a year until you are 65. That's $30,000. But should you suffer a career-ending injury tomorrow, that policy would pay you about half a million tax-free dollars over that time period.

Josh Garskof has written for Consumer Reports, Health, Money, Prevention, Real Simple and the New York Times.

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