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Choosing disability insurance at work

When it's time to sign up for benefits during open enrollment at work, you probably focus on your company's health insurance offerings first, comparing each plan's costs, physician networks and benefits to pick the best one.

By the time you get to disability insurance, you probably simply check a box accepting or declining the coverage and move on.

This year, do yourself a favor and give disability insurance its due. Knowing how much coverage you have, how the policy works and whether you need more is vital.

"The greatest asset 99 out of 100 people own is the ability to earn income through working," says Brett Virgin, a partner at SoundRiver Advisors in Atlanta.

A 25-year-old who earns $50,000 a year and becomes permanently disabled stands to lose $3.8 million in future earnings, the LIFE Foundation says.

group disability insuranceThink it could never happen to you?

About 30 percent of today's 20-year-olds will become disabled and unable to work for at least three months sometime during their careers, according to the Social Security Administration. And workers' compensation won't help most of them because 90 percent of disabling injuries and illnesses are not work-related, says the Council for Disability Awareness. The average long-term disability claim is for about 2½ years.

Just because you have a desk job doesn't mean your risk is low. Illnesses like cancer, heart attacks and diabetes cause most long-term disabilities, the council says. Back pain, injuries and arthritis are also major causes.

How disability insurance works

Disability insurance pays out a percentage of your income if you get sick or injured and can't work. There are two main types:

  • Short-term disability, which typically covers you for three months.
  • Long-term disability, which kicks in after short-term disability ends and then lasts for years, often until age 65.

Most people who have disability coverage get it through their employers, yet only 38 percent of workers have short-term disability and 31 percent have long-term disability through their jobs. So count your blessings if disability insurance is offered at your workplace. (If you aren't that lucky, here's how to find an individual disability insurance policy.)

Your employer might pay the entire premium, or it might pay part of the premium, with the rest paid by you. Often employers will give workers an option of purchasing additional coverage beyond what the company provides.

Meanwhile some employers don't pay any portion of the premium but offer disability insurance as a voluntary benefit. You have to pay for it, but you get the group rate. Usually it's easier to qualify for group disability through the workplace than when you apply for an individual policy on your own.

Be aware, though, that employers are trying to reduce costs for disability insurance, just as they are for health insurance. Lower costs for the employer translate to skimpier benefits or a bigger contribution from you toward the premium.

"A lot of group policies can get watered down for pricing," Virgin says.

John Nichols, founder and president of Disability Resource Group in Chicago, says to think of group long-term disability as basic coverage. "It is for groups of people, not personalized to your needs."

Certainly some coverage is better than none, but you may need more.

Consider these questions when evaluating employer-sponsored disability insurance.

How much will the disability policy pay me?

Most group policies pay anywhere from 40 to 60 percent of your base income if you become disabled, and typically the benefit is capped at $5,000 a month. Bonuses and commissions are not counted as part of base income -- a key detail if those make up a large part of your salary.

Another important thing to remember is that the benefits are taxed if your employer pays the insurance premium, Virgin says.

Nichols says, "Ask yourself, 'Can I afford a pay cut if I become sick or hurt and not able to work?' "

Nichols knows firsthand what he's talking about. He broke his neck in a water-skiing accident 20 years ago at age 32 and wasn't able to return to work full-time for six years. Fortunately, he had individual disability insurance, as well as group coverage, before the accident. The additional coverage enabled him to continue rehab after the group benefits ended. Nichols is spokesperson this year for the LIFE Foundation's Disability Insurance Awareness Month.

He says to check out the LIFE Foundation's Disability Insurance Needs Calculator to see how much coverage you should have.

If you don't have much through work, you could supplement with an individual disability policy.

When does the disability benefit period begin and end after an accident or illness?

The policy usually has a waiting period before benefits kick in. That could be 30 days, 60 days or six months. Benefits may last for a certain number of years or until age 65.

How is 'disability' defined?

Some policies consider you disabled only if you can't work in any job for which you're qualified, even if it's a lower-paying job than your former occupation. And some policies pay only if you're totally disabled. It may not pay out if you can work part-time.

Bear in mind that employer-sponsored disability insurance is not portable. The coverage ends if you leave the company.

The bottom line: Don't take disability insurance for granted. Dig into the details of your employer-sponsored coverage so you know what kind of protection you have and whether you need more.

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