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How to find an individual disability insurance policy

Count yourself fortunate if you have long-term disability insurance as an employee benefit through work -- just 31 percent of workers do. But don't rest too easy -- the coverage through work might not be enough.

"Most people rely on a group policy to cover them," says Brett Virgin, a partner with SoundRiver Advisors in Atlanta. "They're probably a little too trusting of that policy."

Even if you have disability insurance at work, you might need additional coverage through an individual disability insurance policy. And you certainly should consider buying coverage if you have no disability benefits at all. (Here's more on choosing disability insurance at work.)

Disability insurance pays a portion of your income if you become disabled and can't work. Employer-sponsored group policies typically pay out 40 to 60 percent of your base salary. They vary in the extent of coverage they provide. Some, for instance, cover only total disability, not partial disability.

individual disability insuranceAn individual policy can be tailored to complement coverage you already have at work or provide the protection you need if you have no disability benefits.

A variety of insurance companies sell individual disability policies. Among the biggest players are Unum, MassMutual, Guardian, MetLife and Principal Financial Group.

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The annual premium for an individual disability policy ranges from about 1 percent to 3 percent of your gross income, says John Nichols, founder and president of Disability Resource Group in Chicago. You can protect about 60 percent of your income tax-free, he says.

Factors that impact the premium are:

  • Your occupation.
  • Your age.
  • Your medical history.
  • Benefit amount.
  • Waiting period.
  • Benefit period.
  • Optional riders, or add-ons, to the policy.

The application for a policy includes questions about your medical history, and you might have to take a paramedical exam to qualify for coverage. However, some policies feature simplified underwriting, which means you don't have to go through an exam and it's easier to qualify. Simplified underwriting is sometimes available for people who want to buy lower amounts of coverage.

You'll likely pay more for an individual disability policy than you would for a group policy. With group coverage in the workplace the employer usually pays part or all of the premium. Or sometimes the employer gives you the opportunity to purchase coverage yourself at the group rate.

But an individual policy can offer advantages over an employer-sponsored group plan.

1. Disability benefits are tailored to your needs

"Group disability is a one-size-fits-all product, and an individual policy has more customization," Virgin says.

You choose the size of the benefit and the options you want. A variety of riders, or add-ons, are available, such as a cost-of-living adjustment rider to protect you against inflation. Another common rider continues contributions to retirement savings while you're disabled.

MetLife, for instance, recently launched MetLife Income Guard, which offers enhanced protection to physicians and dentists in specialties. Say, for example, a neurosurgeon became disabled and was unable to operate and work in the specialty. With this policy, the neurosurgeon could still collect disability benefits even if he or she were able to start another career.

2. Benefits are tax-free

As long as you pay the premium, benefits are tax-free. When an employer pays the premium for disability insurance, your benefit is taxed, which can take a substantial bite out of your income.

3. Individual disability insurance stays with you

Employer-sponsored coverage generally ends when you leave the company. In addition, your employer could decide to stop offering the benefit to save money.

You control an individual policy. Generally an individual disability policy is guaranteed renewable, which means it stays in effect as long as you pay the premiums.

4. You have a choice of insurance companies

With a group policy, you're limited to the insurance company your employer chooses. When you buy an individual policy, you select the insurance company.

Nichols says the time to think about buying individual disability insurance is in your first job out of college. Earlier is better because you never know when you could become disabled, and it's easier to qualify before you've developed health problems.

The LIFE Foundation offers an online Disability Insurance Needs Calculator to help determine how much coverage you need.

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