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Foolish Advice on Disability Insurance

Apparently, I've touched a nerve. The response to last week's article on long-term care insurance was far more intense than I expected. Many of you have strong feelings about insurance in general, and long-term care in particular.

Today we'll cover a related topic: disability insurance. Should you have it? Sadly, the answer is yes. The odds of someone my age being unable to work for at least a year or more is roughly one-in-five:

Age Today

For Six Months

For One Year

For Two Years

For Five Years

25

35%

27%

17%

13%

30

33%

21%

16%

13%

35

31%

20%

16%

13%

40

28%

18%

15%

12%

45

25%

17%

14%

11%

50

14%

12%

17%

10%

Notes: 1985 Commissioner's Disability Income Table

What it is
Disability insurance comes in two forms: short-term and long-term. Short-term disability insurance is the most likely kind to be offered through an employer and, therefore, is the most limiting in scope. Long-term disability insurance is usually sold separately through a carrier and can be expensive, certainly more so than life insurance.

Why? You're more likely to become disabled than you are to meet an untimely death. And the "living death" of severe disability is likely to be far more expensive than the cost of managing your affairs after your demise, according to insurance agents I contacted in preparation for this story.

The primary difference between short-term and long-term coverage is (surprise!) duration. Short-term coverage usually lasts for 13 to 26 weeks and kicks in after your sick leave allotment expires. Long-term disability insurance comes into play when you're unable to produce income for more than six months.

Should you buy?
So, is it worth it to buy disability insurance? Absolutely in the case of long-term policies. Not so much for short-term options. Remember: Many employers offer accidental death and dismemberment coverage along with cheap life insurance as part of an overall benefit plan. And for those that don't have a policy, emergency savings and other credit sources may provide the capital necessary to fill in the gaps when you're out of commission for a few weeks.

Long-term policies are an entirely different story. Only the richest among us can afford to fund a year or more of lost income; the vast majority will need some sort of protection in the event of a devastating injury. Good luck getting help with Social Security; you'll generally have to be out of work for at least a year and unable to perform any other job.

3 Foolish questions to ask before you buy
Still, Fools remain undecided when it comes to buying a policy. Of those I polled who didn't have employer-sponsored coverage, nearly 50% said they'd rather roll the dice.

That's understandable. Shopping for long-term care insurance is about as fun as cleaning up after a dog with a digestive problem. And it can be just as messy. So, before you buy, be sure to ask these three Foolish questions:

1. What can really you live on? Insurance agents I spoke with say that, most often, you can expect disability insurance to cover up to 60% of your earlier income. Plus, you'll be subject to an "elimination period" that acts like a deductible. So, for example, under a 90-day elimination period you'll have to wait three months before receiving benefits. You'll want to take these unfortunate facts into account as you budget, build up emergency savings, and shop for coverage.

2. Can you find other work? Long-term disability plans differ materially by the type of coverage they offer. The best may be "own-occupation disability insurance," for it pays you for a disability that prevents you from performing the occupation you had when you signed up for the policy. So, if an injury forces you to hand in your doctor's scalpel for a burger-flipper's spatula, you'll still receive benefits. Not so with other common forms of coverage, such as "income replacement" policies. Before buying, take inventory of transferable skills that would aid you if, say, you were suddenly confined to a wheelchair.

3. What's your backup plan? Many long-term care policies will be written to deliver benefits till you're age 65 on the theory that Medicare and Social Security will take over at that point. Similarly, many policies won't increase benefits over time unless you purchase an expensive rider that indexes your benefit to inflation. So, be honest about what your backup plan is. Could your spouse work? Does he or she work already? Could nearby family aid with your care and recovery? And, finally, do you have a long-term care policy to draw on should you lose two or more activities of daily living (ADL)?

Follow the money
As with long-term care coverage, disability insurance is a complex product that's only useful when heartbreaking circumstances occur. That's why we hate thinking about it. But you need a plan; the odds are simply too great that hundreds of you reading this right now will need a disability benefit before you die. (Bummer, I know.)

Have other money tips? Tell me. I'm writing new articles on personal finance and investing basics every week as part of our new money management service, Motley Fool GreenLight. It's tailor-made for Fools like you who aim to take control of their financial destiny. Click here to learn more.

Fool contributor Tim Beyers says to stay tuned for next week's coverage of business liability insurance. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get a peek at everything he's invested in by checking Tim's Fool profile. The Motley Fool's disclosure policy is in it for the long term.


Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2009, at 4:34 PM, acmoller wrote:

    hey, this article is a few years old, but I just want to thank the author. I'm in the midst of trying to decide whether to opt into LTD insurance offered by my employer, and couldn't find what I felt was objective advice anywhere else I looked. This was to-the-point and helpful. thank you.

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Tim Beyers
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Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.

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