If you're under 65, your chances of becoming disabled are much greater than of dying, experts say. In fact, if you're over 21, you have a nearly 1-in-3 chance of being disabled for some period before you retire, according to the Health Insurance Association of America.
What's more, being disabled can wreak more financial havoc than death. There's no life insurance to bolster the family assets, and the wage-earner still has living expenses even though he can no longer bring home a paycheck. In many cases there are extra medical expenses or added costs for home care.
Despite the disastrous consequences that would befall most Americans who lose their paychecks, most do not have disability insurance, which replaces a portion of lost income. And many of those who do may not be as well protected as they assume.
"Disability insurance statistically is more important than lif insurance," says Richard H. Wagener, a financial planner and owner of Financial First Advisors in Columbia. "The typical family that spends just about everything it makes should get the maximum."
Most companies with 100 or more workers generally provide some type of coverage. But employees of small companies or self-employed workers usually have to get their own policies. Blue-collar workers often have trouble getting coverage at all.
"It is so important for employees to find out the terms of their employer-sponsored policy," says Sally Leimbach, a vice president at RCM&D, an insurance brokerage.
But too often employees don't know what the policy provisions are, or whether they are covered through a group insurance plan or a pension plan, or -- critically -- whether the benefit is taxable, says Bruce Mitchell of the Baltimore office of William M. Mercer Inc., a benefits consulting firm.
"One of the most common misconceptions is that employer-provided benefits are non-taxable," Mitchell says. "If the employer is paying for it, it's taxable."
A typical group plan, he says, pays 60 to 70 percent of the disabled person's salary offset by any other benefit, such as Social Security disability or workers' compensation.
If the employer pays the premiums, that benefit will be taxed as income. If the employee pays the premiums with after-tax dollars -- that is, income that has been taxed -- the 60-percent benefit is tax-free.
"It's not unusual for employers to sponsor plans and have employees pay for it. There's good reason," Mitchell says.
Still, employer-sponsored plans offer a big advantage even if the workers pick up the tab: The premiums are much cheaper than for individual policies.
Samuel Hoyle, also of RCM&D, points out that a person's occupation determines the type of available coverage.
"The farther you go down on the occupational ladder, the more restrictive the language and the higher the premiums," he says.
And, as Leimbach says, "The better the benefit and the longer it pays, the higher the premium."
Here's a rundown on some of the critical points to consider for both group and individual coverage, including the policy's definition of disability, the amount and duration of benefits and .. the waiting period until benefits begin:
* Definition of disability.
Generally the more restrictive the definition, the lower the
"The average group plan often defines disability as not being able to perform your own job, but that often lasts only for two or three years,"Mitchell says. "Then it's 'responsibilities for which you are suitably trained.' "
That change in wording means you might have to take a job that pays much less. Other policies might not pay benefits as long as you can do just about any job.
In individual policies, the best coverage, called "own occupation," defines disability as not being able to work in your particular occupation. Generally that is available only to professionals or top corporate executives. Under that definition, a surgeon who lost the full use of his hands would draw his full disability benefit even if he could still function as a physician, say as a medical school teacher.
Be sure you understand exactly how your policy defines disability.
Wagener recommends a policy with an occupational definition that pays a residual benefit. Without a residual benefit, which pays proportionately for a partial disability, you would lose your benefit once you resume work. For example, if you were able to earn 50 percent of your income, you would get half the benefit. A residual benefit, Wagener says, is particularly suited for someonewho is self-employed.
AAlso, make sure your policy covers disability resulting from both accidents and illness.
* Waiting period.
Policies can begin to pay benefits anytime from the first day of disability to a year after the disability occurs. The longer the wait, the cheaper the premium.
"You don't want first-dollar coverage," Wagener says, because it's too expensive.