If you don’t have any employer long-term disability coverage or if your employer’s coverage falls short, look into whether you’re eligible to buy individual disability income insurance. Here’s what to look for in a policy.

Check out your options. The type of individual disability income insurance policy you may be eligible for and the cost depends on your age, gender, occupation, health, and income, among other factors.
 
Insurers typically review your medical and financial history and consider any other disability coverage you have before issuing a policy. If you present a higher level of risk, an insurer may only offer you a policy with some type of limiting modification or adjustments from a standard policy. 
 
For example, you may be issued a policy at a higher-than-standard premium rate, or a policy with a longer elimination period, or an exclusion for disabilities resulting from specified causes or conditions. It’s also possible that you may not qualify for coverage at all.
 
When applying for coverage always answer questions about your medical history and health completely and truthfully. If you’re dishonest the company may later be able to cancel your coverage.

Evaluate the benefits. Individual disability policies typically provide benefits for a specified number of years or until age 65, up to a specified maximum monthly benefit. Comprehensive policies pay benefits for both accidents and illness.

To make sure you have an incentive to return to work and to avoid overinsurance, insurers limit benefits from all sources, including any Social Security or workers’ compensation disability benefits you may qualify for, to a percentage of your pre-disability income.

If you’re a high-income worker, the percentage of income a disability policy will replace is lower because there’s less need to replace your discretionary income.

Consider your needs. If your employer pays the policy premiums, any policy benefits you receive are included in your gross income and are taxable.

If you have a policy that you pay the premiums for on an after-tax basis, any benefit payments you receive generally are not subject to income tax. Consequently, you don’t need a policy to replace as large a percentage of your income as you would if your employer was footing the bill.
 
You can make longer benefit periods more affordable by electing longer waiting periods. To carry you through until your policy kicks in, rely on any short-term disability benefits or sick pay you have, or build an adequate emergency fund.
 
Focus on how disability is defined. Policies vary in how they define disability, so be sure to get the specifics. Some policies define disability as being unable to perform your own regular occupation, while other policies define it as being unable to perform any occupation you're reasonably suited for by education, training, or experience.
 
More commonly, policies have a combined split definition of disability. For example, some policies will provide benefits during a specified initial period of disability if you’re unable to perform your regular occupation. After that, these policies will continue to provide benefits only if you’re unable to perform any occupation for which you’re reasonably qualified by training, education, or experience.
 
Alternately, some policies or policy riders define disability in terms of the amount of income lost following a disability. These policies cover a shortfall in earnings if you become disabled and suffer a loss of income that exceeds a specified percentage.
 
Some policies also offer so-called presumptive benefits, which are typically paid in the event of loss of sight, speech, hearing, or use of limbs. Under these benefits, you’re automatically considered totally disabled for these specific disabilities, even if you’re able to work.

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

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