Disability Insurance

THROUGH THEIR employer, many people have disability insurance, which provides them with income if they can’t work. The term “disability” might suggest some sort of injury, but the vast majority of long-term work absences result from illnesses, such as heart disease or cancer. Don’t have disability coverage through your employer? You might want to buy a policy on your own.

Think of it as protection for your human capital’s income-earning ability. Disability insurance can be especially important for those who are single. While someone who is married can rely on the other spouse to keep bringing in a paycheck, you won’t have that safety net if you’re on your own.

Individual disability policies have elimination periods, such as 90 or 180 days, which is the time you have to wait for benefits to begin once you meet the policy’s definition of being disabled. The longer the elimination period, the lower your premium will be. You can also hold down premiums by limiting the number of years that benefits are potentially paid and by reducing the monthly benefit amount.

If you have group coverage through your employer, any payout will be taxable. What if you buy disability insurance on your own? If you deduct the insurance premiums you pay, any payout from the policy will be taxable. But if you don’t take the deduction, the benefits paid are tax-free. Most folks should probably take the deduction, because they are likely to be in a higher tax bracket when they pay the premiums than when they receive the benefits.

Disability insurance is all about the details: You’ll want to know whether the policy will pay you benefits if you can’t do your current job or only if you can’t do a similar job—or perhaps only if you can’t work at all.

Disability benefits are also available from Social Security. But to receive them, your disability has to be sufficiently severe that it’s expected to result in death or to prevent you from working for at least 12 months. Even then, once you’re deemed eligible, you’ll have to wait more than five months for payments to start.

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