Like most people, you may have life insurance to help protect your family against the financial impact of your unexpected death. You also insure your home, car, and other personal possessions against financial loss resulting from fire, theft, or damage. However, you may have overlooked insuring one of the more important aspects of your financial life—the ability to earn an income.
Thinking the Unthinkable
Have you ever contemplated how long the combined resources of you and your spouse might last if you were suddenly out of work due to a disability? If those resources provide less than 60% to 70% of your monthly expenses, including taxes and regular savings, you may need disability income insurance coverage. Whether you need an individually-owned policy depends on the extent of your liquid assets, your spouse’s income, and other potential sources of disability income (employer-sponsored group coverage, workers compensation, and Social Security, as well as veterans and union benefits).
Depending on your income and the risk level of your occupation, the maximum coverage you can buy will generally replace 45% to 75% of your pre-disability earnings. The higher your income, the lower the percentage of replacement benefit. Typically, premiums will depend on your age, your health, the risk level of your occupation, and the type of coverage.
Examine Policy Provisions
To make sure your disability income insurance offers the protection that you and your family need, your policy contract should include the following:
o A favorable definition of total disability that is consistent with the risk of your occupation and, at a minimum, ensures the payment of benefits in the event you suffer a “loss of income.”
o A non-cancelable clause that states the insurance company cannot cancel the policy or increase the premium until a certain age (as specified in the policy).
o Benefits that are payable until age 65 or for life.
o A waiting period that is consistent with your overall financial resources. The cost of disability income insurance decreases according to the waiting period selected. You can purchase coverage that provides benefits on the 31st day of disability or up to two years later.
Now is the time to investigate the relative benefits and costs of disability income insurance to determine how much you need to spend to attain adequate protection. In addition, it is important to review the particular details and provisions of the policy you are considering with a qualified professional to help ensure your financial needs will be met.