Can You Pay the Bills if You Can’t Work?

Whether you work for yourself or someone else, you probably can’t afford to do without income if a serious illness or accident strikes. There are some important steps you should take to ensure your salary and savings will be protected if you’re on your back.
Step 1: ID your income. Know your needs. While you’re healthy, figure out how much monthly after-tax income you would need if your salary stopped due to a long-term disability. Use the free online calculator at www.life-line.org (in the “disability income insurance” section).

Step 2: Scan your plan. Ask your company’s benefits department for a copy of your disability plan. Most policies cover short-term disabilities lasting up to 26 or even 52 weeks and long-term disabilities that last up to age 65.

See if you qualify for the coverage and what type of disabilities trigger payment, says George Faulkner, principal at Mercer Health & Benefits, an employee benefit-consulting firm. Some policies require that you work at a company for a set period before you’re eligible and pay only if you can’t perform all of your job’s tasks rather than just some of them.

Most company long-term disability plans cover 60% of your annual salary—but only up to a dollar limit, often about $5,000 a month. That means the most you can be paid is $60,000 a year. You also will owe income tax on payments when your company pays the policy’s premium.

Step 3: Go outside. Your company-provided disability policy probably won’t be sufficient if you earn more than six figures.

The solution is to buy additional coverage on your own from an insurance agent to make up the difference, says Frank Darras, an attorney with the firm DarrasLaw who represents individuals seeking payments from disability insurers.

“Buy as much coverage as you can based on your income,” advises Darras. “Remember: You do not owe income tax on payouts from disability policies purchased your own—only those provided by your employer.”

Step 4: Lower the cost. If you earn a six-figure salary, the premium for additional coverage may run you $1,000 or more per year.

One way to reduce disability premiums is to choose a longer waiting period before payments start.

“Most policies have a 90-day waiting period,” Darras says. “If you can choose a 180-day period and live on your savings for the six months, you could reduce your premiums by up to 20%.”

You also can save by choosing a five-year, occupation-specific benefit period rather than coverage through age 65 or 67, since most people recover from disabilities during that period. “It’s a risk, though,” warns Darras. “Your benefits could run out before you’ve recovered sufficiently to resume working.”

Step 5: Shop smart. Once you’ve decided on the type of disability policy you need and can afford, get quotes from several different reliable carriers.

Many insurance Web sites offer free quotes based on your age and health. But pay careful attention to a policy’s rules for disability payments. Some policies will pay only if your condition prevents you from working at any job.

“For example, if you’re a software engineer, you want to avoid policies that won’t pay if you can repair computers or teach computer classes,” says Darras.

Once you have a rough idea of what individual coverage will cost based on your preferred terms and waiting period, ask your insurance agent for at least three quotes from different insurance carriers.

“Remember, when shopping for coverage, the big print provides features and the little print takes them away,” says Darras. “Make sure you understand the pros and cons of any policy before buying.”