Disability insurance is basically insurance for your paycheck. If you are ill or injured for an extended period of time and miss work, disability insurance would cover a portion of your income. Many of you are familiar with this coverage through your employer. You may have STD (short term disability) and LTD (long term disability) coverage of up to 60% of your salary. The Short Term kicks in after a waiting period of 2 to 4 weeks and lasts in most cases for 3 months the Longer term generally kicks in after a 3 month waiting period and will go to age 65 depending on policy specifics. Much like group life coverage, you need to evaluate your group coverage to determine if 60% of your salary would cover your cashflow needs if disabled. If not then shopping for an individual LTD policy to supplement your group coverage might be a good idea.
One of the most confusing aspects of disability coverage is how it is defined by the insurer. Some cover your ability to work in your occupation, and some define disability as the ability to work in any occupation. Big difference there, so be aware when shopping for coverage. Here are some helpful policy terms and definitions:
- own occupation: considered disabled if unable to perform the duties of policy owner occupation. This is the most sought after definition and usually has a time period such as 5-year Own Occupation, where the insurer will pay benefits for a minimum of 5 years and then reevaluate to determine if you can perform another occupation which would reduce your monthly benefit.
- modified own occ: same as above but if you do go out and get another job outside your former occupation the insurer will quit paying.
- any occupation: considered disabled and paid benefits if unable to work "any" occupation for which person is reasonably suited by education, training and experience.
Here are a couple of other insurance terms you need to know along with the definitions:
Noncancellable: simply means that once you issued the policy the insurer cannot take it away and cannot change the premium from what is stated in the contract.
Guaranteed Renewable: similar to above in that once issued you have the right to keep coverage as long as you make the premium payments, however the insurer could potentially raise future rates as long as they make the change on the entire policy class.
*Keep in mind that disability insurance is there to insure your income. If you are not working you won't be able to get coverage.