by Archie M. Richards, Jr.
June 4, 2007

Would you suffer financial disaster if sickness or injury forced you to be out of work for a year or more?

Nearly half of Americans have long-term disability insurance, provided in most cases by their employers. But if you don't, you may need to acquire long-term disability insurance yourself. While you're unable to work, the insurance company would pay you regular income.

According to the National Association of Insurance Commissioners, more than half of U.S. adults say they'd be unable to meet their expenses if they couldn't work for a year or more.

The Social Security Administration estimates that one-fifth of Americans will become disabled for a year or more before reaching 65. The most common causes: heart disease, back injuries, and cancer.

Here are factors that determine the premium costs:

• The higher the monthly benefits, the higher the premiums. Determine how much money you'll need to cover critical expenses, such as housing, food, utilities, and transportation. Many people settle on benefits covering 50-to-60 percent of their annual salaries.

• The longer you wait for benefits to begin, the lower the premium cost. Waiting periods run from 60 days to 2 years. Many people select 90 days. (This may be too short. You can cut the premiums by lengthening the time before you begin receiving benefits.) A policy may offer one waiting period for illness and a shorter one for an accident. If your employer provides a short-term disability policy, the waiting period on your long-term policy should be coordinated with the benefit period of the short-term policy.

• The longer benefits last, the higher the premiums you pay. Common choices are 2 years, 5 years, and payments to age 65 (when retirement benefits begin). It's probably better to select a longer benefit period, but offset the extra premium cost by lengthening the waiting period.

• Those who acquire a disability policy when they're young and healthy pay lower premiums, although of course they pay for a longer time. If you expect your earning power to grow, consider paying extra for the option to increase your coverage without additional medical underwriting.

• Premiums are higher if the benefits continue until you can return to your own occupation. If benefits stop when you take any occupation, the cost is lower. I favor the latter.

• If you have a pre-existing condition, such as a back problem or heart ailment, the policy probably won't pay benefits if you become disabled for that reason. But if you furnish documentation that the pre-existing condition has improved, the insurer may remove the exclusion after a certain time.

• Premiums are higher if you want your benefits to be adjusted for changes in the cost of living.

• Providing your premiums are paid on time, neither "guaranteed-renewable" nor "non-cancelable" policies can be cancelled. But the premiums of guaranteed-renewable policies are less expensive, because the insurance company can increase the premiums. (It may do so only for an entire class of policyholders.) Non-cancelable policies are more expensive, because, after the medical examination has been approved and the policy issued, the premiums cannot be raised.

• If your employer pays for your disability policy, the premiums are not considered income to you and not included in your taxable income. But any benefits you receive are taxable. However, if you acquire your own policy and pay for it with after-tax dollars, any benefits you receive are tax free.

• Most companies offer a reduction of the premium if the benefits paid by the insurance company are offset by disability paid by Social Security. Think twice about choosing this option. Social Security has a strict definition of disability and is unlikely to pay benefits. After your insurance company begins to pay benefits, it may require you to reapply for Social Security benefits every year and provide evidence that you have again been turned down. For a disabled person, this is an arduous task.

If being unable to work for a long period would be a financial disaster, investigate buying a long-term disability policy.