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Disability Insurance

By David Luhman on Mon, 05/11/2009 - 23:30

Disability Insurance

What is disability insurance?

Do you need disability insurance?

How to buy disability insurance - if you need it

What is disability insurance?

The need to insure your income in case you're injured

Most Americans don't even think about this type of insurance

You need to determine if you need this kind of insurance

  • Likelihood of being disabled is greater than chances of dying before age 65
  • Consider buying if you're single and have dependents

Do you need disability insurance?

Your employer may already provide coverage

Social Security provides some coverage

Average Social Security disability payment for a person with a spouse and two children is $1,100 per month

Five month waiting period before Social Security benefits start

You need an emergency fund of three to six months of expenses

A spouse can re-enter the workforce if necessary

Another alternative is saving through an IRA, 401(k) or similar account

  • May be better than spending thousands a year on disability insurance premiums
  • These funds can be accessed without penalty if you're disabled

The definition of "disability" is very narrow for most policies

Most disability payments are reduced by payments from Social Security, auto or other insurance

How to buy disability insurance - if you need it

Premiums depend on your income

The higher your income, the higher the premium

A 40 year-old man who makes $60,000 annually may pay $2,000 or more a year in disability insurance premiums

Buy enough insurance to cover 80 percent of your current income

  • Expenses will probably drop with disability
  • No income taxes on benefits if you buy the policy yourself

Cut premium costs by getting a longer elimination period

Elimination period is time (three to nine months or more) when the insurance company won't pay you benefits

Be very careful about how the policy defines "disability"

If you can't do old, high-paying job but can still work, you may not get benefits

The classic example of a doctor who suffers a hand injury

Can't perform surgery but can flip burgers

No disability income benefit, depending on the policy's terms

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