Disability Insurance Checklist

Size up your employer's coverage. Most employers offer some type of short-term sick leave, and according to the Health Insurance Association of America (HIAA), almost one-half of midsize and large employers provide some type of long-term coverage.

If your employer offers long-term disability coverage, ask for all available written plan information, and keep it for future reference. Check to see if you’re currently covered, how long you must wait before benefits begin after the onset of a disability, and how long benefits will continue. Also ask if you can buy optional disability coverage to supplement your employer’s policy, if necessary.

Group long-term disability policies start when short-term disability benefits are exhausted, and typically replace about 60% of your salary, up to a specified ceiling, for anywhere from five years to life. Some plans are portable, which means you can keep your coverage if you leave your job, perhaps without having to pass a health exam.

Don’t count on Social Security or workers compensation. Social Security only considers you disabled if you're unable to do any kind of work you're suited for, and if your disability is expected to last for at least a year or to result in death. Even if you meet these stringent requirements, however, the benefits may not be enough to meet your needs. As far as workers' compensation, it only protects you if you suffer an accident at work, or an illness that results from your employment.

Assess your needs. If your employer's long-term disability coverage falls short, look into buying an individual disability policy, which commonly replaces 60% to 70% of your income, and provide benefits for one year, two years, five years, or to age 65. Depending on your age, occupation, health status, and other factors, however, you may not be eligible for a policy with the richest benefits.

Financial advisors generally recommend that you have enough disability coverage to replace at least 60% of your current income, and that you make policies more affordable by electing longer waiting periods and building a large enough emergency fund to carry you through any short-term disabilities. Furthermore, the Health Insurance Association of America recommends that you seek coverage for both illness and accidents, especially as you get older, when it’s more likely you’ll need to be covered for sickness than injury.

The exact amount of coverage you need depends on your financial situation and whether you or your employer pays the policy premiums. In general, if you pay the premiums, any benefit payments you receive under the policy in the event of disability aren’t subject to income tax. Therefore, when you’re paying the premiums, 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.

Protect yourself in the event you become incapacitated. If you’re unable to make decisions for yourself, your future is left in other people's hands. To document your wishes now, create the following:

• A durable power of attorney for finances, which allows you to designate someone you trust to manage your financial affairs
• A durable power of attorney for health, which appoints someone to make decisions about your medical treatment
• A living will, which spells out your wishes regarding the use of life-sustaining procedures