What If Suddenly You Can't Work?

The worst time to discover that you need extra disability insurance is--when you need it. Do the math now to ensure you have adequate coverage

If you think you've saved enough to weather a long-term disability, consider this: A year of total disability can wipe out 10 years of savings for someone who has socked away 10% of income annually, according to Northwestern Mutual insurance company. Yet few wage earners are sufficiently covered by disability insurance. That's troublesome, since "a person in their 40s is more likely to have a long-term disability than they are to die," says Anna Rappaport, a principal with William M. Mercer, a human-resources consulting firm.

Evidence suggests that women are putting themselves at greater financial risk than men. "In many couples, where the husband earns more than the wife, there is a rationalization that the wife doesn't need disability insurance," says Dan Moisand, president of Optimum Financial Group, a Melbourne Beach (Fla.) financial-planning firm. But the reality is women with jobs outside the home are three times more likely to miss work because of a disability, including maternity leave, than men, says a 1999 survey by the Labor Dept. And they often can't count on the husband's salary to make up the lost income.

Women without disability coverage are not the only ones in peril. Even if the company offers a standard disability benefit, it usually isn't enough. Most people need to buy a supplemental policy--either through their employer, if one is available, or privately--to make sure 60% to 70% of their total taxable income is protected. (Be aware that you can't replace 100% of your salary because the insurer wants to make sure you have an incentive to return to work.)

STILL TAXED. Employer-provided coverage falls short for several reasons. While such plans often say they protect up to 60% of base salary, when the company pays the premiums, the employee will owe income tax on the benefits. That reduces the percentage of income replaced. What's more, many group policies have a monthly payment cap of $5,000 to $10,000, which can cut into benefits for higher earners. And most plans don't cover income from bonuses. But many workers aren't aware of all this. Among those employees who had employer-provided disability coverage, 43% of them didn't know what their benefit provided, according to an April, 2000, study by the Consumer Federation and the American Counsel of Life Insurers.

A supplemental insurance policy can help to make up the shortfall. My own situation is a case in point. Using the Disability Income Gap calculator at www.northwesternmutual.com, I found that my employer's basic plan covered 48% of my current take-home pay. (Social Security has a disability component, but eligibility requirements are strict.)

ADEQUATE CUSHION. Fortunately, The McGraw-Hill Companies, which owns BusinessWeek, offers a low-cost, long-term disability option, which runs me $21 a month or $252 a year. A private policy with similar coverage would cost at least $1,730 a year or about $144 a month. My extra coverage is not subject to income taxes because I pay the premiums with aftertax dollars. The policy pays benefits for up to 24 months, provided my disability prevents me from performing my job. After two years, I am eligible for benefits only if my disability prevents me from doing anything I am qualified to do. All told, it protects an additional 25% of my salary for a total replacement benefit of 73%, which gives me a comfortable cushion should I become disabled.

Disability insurance can be complicated. But you're better off taking the time now to make sure you're properly covered than to wish you had done so when it's too late.

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By Toddi Gutner

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