Overlooking disability insurance can be costly

CHICAGO — Long-term disability insurance is the forgotten insurance. The importance of auto, health, homeowners and life insurance is well known. But disability coverage, which replaces lost earnings if you can’t work, tends to be ignored — until you need it.

Government studies show that a 20-year-old worker has a 30 percent chance of becoming disabled before reaching full retirement age. Yet only about a third of employees in private industry have long-term disability insurance, says the Bureau of Labor Statistics.

“It could be argued that the disability of a breadwinner is worse than the death of a breadwinner,” says James Hunt, actuary at the Consumer Federation of America. “The disabled person is still soaking up money.”

That’s why it makes sense to buy individual coverage if you’re self-employed, or not covered sufficiently or at all by your employer. A look at what you need to know:

Q: How does disability insurance work?

A: Disability insurance protects from a loss of income resulting from an inability to work due to an accident or illness. You typically receive disability checks starting three to six months after you become unable to work.

There are three sources of this coverage: The Social Security Administration, employers and private insurers.

Social Security Disability Insurance is the bedrock protection against disability. About 153 million workers are insured by the program through FICA taxes. But it has a very strict definition of disability and it can take two years or more to be approved for benefits.

Many employers offer disability coverage through a group plan, which pays a specified portion of your salary.

Private insurance coverage is most often sought by high-income professionals such as doctors and lawyers who have made a huge investment in their earnings potential; self-employed workers, and executives looking for supplemental coverage.

Q: Do you need to buy coverage if you receive disability insurance through your employer?

A: It depends whether you could get by on the benefit checks. A typical group plan replaces just 40 percent to 60 percent of your salary, up to a maximum $5,000 a month or $60,000 a year. And if the employer pays your premiums, the checks will be taxable.

Benefits can last for either a set number of years or until retirement age. Check your plan’s details closely. Company benefits have been steadily shrinking in recent years. Group policies often limit the duration of benefits to only two years if you can’t perform your job duties.

If your policy looks insufficient, ask your employer whether you can pay for additional coverage. Otherwise, consider getting extra insurance from a private insurer.

Q: Why can’t you count on Social Security Disability Insurance to cover your needs?

A: The average disability benefit is just $1,111 a month, based on payments by the Social Security Administration this month to 8.8 million beneficiaries. And you qualify only if you are unable to work in any capacity, not just at your chosen occupation.

A list of conditions that are considered disabling is available by doing a search for “disability evaluation” at the agency’s website, www.ssa.gov.

Q: How much does disability insurance cost?

A: Prices vary based on age, gender, occupation, amount of coverage and health status. Check with a broker to get quotes from at least three different insurers.