How Will You Live if You Can’t Work? Disability Insurance 101

Private disability insurance can offer excellent coverage. But it's expensive. Here's how to know if you need it and how much to buy.

Tips

  • Grab coverage offered through work. If you have the chance to buy disability coverage through your job, it’s usually good to grab it because group plans through employers are likely to be cheaper.
  • Pay with “after-tax” dollars. When buying coverage through work, you’ll be offered the option of paying your insurance premiums with “pre- or post-tax” dollars. In other words, you must decide whether to deduct the cost of premiums from your taxes now and pay taxes on the benefits later, when or if you draw them, or pay your insurance premiums without taking a deduction, which allows you to draw the benefit later, if you need it, tax-free. Don’t deduct the premiums, Harnett advises. It’s better to pay a relatively small amount of tax today (typical long-term disability premiums run $250 to $400 a year), while you are working than pay income tax on disability checks when you are out of work and need every penny.

4. Private plans offered in a workplace

Some employers invite insurers into their company to sell disability policies at group rates, although this is not a company benefit. Aflac and Colonial Life are two insurers that sell supplemental disability plans in workplaces, Harnett says.

These offerings are known as voluntary benefits or worksite benefits. They may be a useful option if coverage is good and premiums are low because of group rates.

5. Association policies

Another way to get cheaper group rates when you must buy your own disability insurance is getting it through a professional association or group. Unions, clubs and professional organizations may offer group plans.

6. Private individual coverage

Private individual coverage is the most-expensive way to get disability insurance. But sometimes it is necessary to get enough coverage. Ask an insurance broker or your HR department to help you assess your coverage from the various sources available to you and to identify the gaps. Also, you can assess your options by getting quotes online, from PolicyGenius.

Consider the coverage you already have, including any out-of-pocket costs, waiting periods and benefit caps and find an individual policy to fill the gaps as much as possible.

If the cost is more than you can pay, see if you can drop some features to get the basics you need most. Possible tradeoffs include:

  • Reducing your payout time (eg. benefits for only five years vs. until retirement age).
  • Agreeing to have your benefits reduced, or offset, if you receive income from other sources — SSDI, for example.

Do you have disability insurance, or hope to get it? Share your thoughts in the comments section below or on our Facebook page.

Marilyn Lewis
Marilyn Lewis
After a career in daily newspapers I moved to the world of online news in 2001. I specialize in writing about personal finance, real estate and retirement. I love how the Internet ... More

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