Did you know that you have a greater risk of becoming disabled than you do of dying prematurely? This is true even if you don’t work in a high-risk occupation, since most disabilities are caused by illnesses like arthritis, cancer, and heart disease rather than by accidents. Many people who become seriously disabled remain unable to work for years, with financially devastating results.

You can guard against such financial damage with disability-income insurance. It will replace a portion of your wages in the event that you’re unable to work.


Many need it but few have it

Most workers, though, don’t have this protection. The Department of Labor’s Bureau of Labor Statistics reports that only 29 percent of workers had employer-sponsored coverage for long-term disability in 2006. “Disability-income insurance is not on the typical American’s radar,” says Chris Burke, president of the AMA Insurance Agency, a subsidiary of the American Medical Association.

What’s more, even those with coverage might discover holes in this security blanket. Craig Carnick, a fee-only financial planner in Colorado Springs, relates the story of a 50-year-old client we’ll call John, who was earning $100,000 a year. In late 2004, John fell off a ladder while working on his roof and suffered a serious head injury that left him unable to work.

No work means no paychecks for John. Fortunately, he has two disability policies: one from his employer, which pays two-thirds of his salary, and a separate policy he bought, which pays $20,000 a year for five years. Between the two plans, John hasn’t suffered any serious financial setback--yet.

“In 2009, John will stop getting benefits from the supplemental policy,” says Carnick, who points out that those benefits are tax-free because John paid the premiums. He will be left with the employer-provided benefits, which are fully taxable because the company paid the premiums. In another 10 years, at age 65, that policy will cease, too. Moreover, growth of his retirement fund will have been stunted because of lower income from age 55 to 65.

The moral of the story? “There is no such thing as too much disability insurance,” insists Carnick, “and you should get the coverage for as long as possible.”

This advice is often difficult to follow because individual disability policies can be expensive. “In my experience, the really good disability policies are purchased by senior executives and professionals,” says Carnick. “Most others just blanch at the premium prices, so they don’t buy anything or just pick up a stripped-down policy that would have little value.”

To give you an idea of how pricey this coverage can be, Howard Recht, a New York insurance agent, tells of a 40-year-old doctor who purchased disability coverage. “The policy will pay this doctor $8,000 per month if he is disabled,” says Recht, “and his premium is about $5,000 per year.” Not many people are willing to pay so much for coverage they might never need.


Defining disability

Before you buy a policy on your own, find out what your employer already provides. If that coverage is inadequate, you may want to consider buying an individual policy. But be careful when shopping for disability insurance: An inexpensive policy may not provide the coverage you need. “When you are evaluating a disability policy, one vital element is the definition of total disability,” says Herb Daroff, a certified financial planner at Baystate Financial Planning in Boston. “You may save a great deal of money on the premium but end up with a definition of disability that minimizes the possibility you’ll ever collect a benefit.”

The most comprehensive policies will have language that reads something like this: “You are disabled when, as the result of an illness or injury (accident), you are unable to do any (one) of the material duties of your own occupation.” In industry lingo, this type of policy is “own-occ” coverage. The classic example involves a surgeon who is hurt in an accident and can no longer wield a scalpel. He might still earn a very comfortable living teaching in a medical school, say, or practicing some other type of medicine, but he would still collect a full insurance benefit because he could no longer perform surgery, the policyholder’s “own occupation.”

J. Robert Hunter, director of insurance for the Consumer Federation of America in Washington, D.C., says own-occ is best, but cost may be an issue. Buyers need to research prices for various types of policies to make a valid comparison. Another type of policy might define disability as follows: “You are disabled when, as the result of an illness or injury (accident), you are unable to do all of the material duties of any occupation (based on your prior training or experience).” Such a policy, called “any-occ,” will cost less than own-occ coverage, but it’s more difficult to collect benefits from. In the above example, the former surgeon teaching at a medical school would not get a check each month because he could still work.

To make things even more complicated, some policies will pay benefits on an own-occ basis for, say, two years, after which the coverage reverts to any-occ. With such a policy, your benefits could cease after two years if you’re able to do some work for which you’re qualified.

The word games don’t end there. Disability insurance might be noncancelable (“non-can”) or guaranteed renewable. Non-can policies actually are also guaranteed renewable, meaning your coverage must be renewed as long as you keep paying the premiums. But with non-can disability policies, premiums can’t increase at all. With guaranteed-renewable policies, premiums can be increased only for an entire class of policyholders. Many advisers prefer non-can, but these policies are more expensive. You have to decide if it’s worth paying the extra amount to avoid the risk of premium increases.