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Getting the best deal on disability insurance


No work, no money: Without a job, most of us would be in the poorhouse. Consider what would happen if an illness or accident prevented you from working permanently. How would you survive a lifetime without income?

In the prime of youth, it's tough to think about disability insurance, which essentially replaces your wages if you become incapable of working. But at age 25, there's a 40 percent chance you'll become disabled before turning 65, according to the National Association of Insurance Commissioners.

Put another way, you're four times more likely to become disabled than to die during your working years, making disability coverage even more important than life insurance for people without children or other dependents, says Byron Udell, chief executive of AccuQuote, a provider in Wheeling, Ill.

Most employers provide short-term disability insurance, which covers 55 percent to 65 percent of your salary for up to six months. But for a 25-year-old, the average length of disability is nearly 2 1/2 years. To make up the difference you need long-term disability insurance.

Long-term disability insurance typically pays 60 percent of your salary until age 65, though you can pay for shorter terms (cheaper) or a higher percentage depending on your salary (more expensive).

If your employer does not cover the premium, you still may be able to buy into a group policy, which generally is cheaper than buying as an individual.

The discount is key when you consider the cost of disability insurance. A basic individual policy will run about 2 percent of your salary, or $720 a year for someone earning $36,000.

When you, not your employer, cover the premium with after-tax dollars, any benefit you receive while you're disabled is tax free.

Major insurance providers offer long-term disability policies, but contact your state's insurance department to help find an insurer or confirm that one is legitimate (www.naic.org links to each state).

Some policies pay benefits if you cannot do the job for which you were educated or trained. Less-expensive policies will pay benefits if you cannot do any work. And mid-range options will be a combination, limiting benefits to your "own occupation" for, say, two years, and expanding to "any occupation" thereafter.

Most policies have a 90-day waiting period before the payouts kick in.

Note whether the policy offers residual or partial benefits, which means you would receive a portion of the monthly payout if a disability stopped you from performing some of your usual duties.

If you're buying insurance for the long haul, opt for a non-cancellable policy. Your premiums, which become more expensive if you buy at an older age (though not as drastically as with life insurance), are fixed.

Rates on a guaranteed renewable policy, however, can increase.

Finally, while disability insurance is sold as a percentage of your salary, that amount - for example, 60 percent of $36,000 a year, or $1,800 a month - is set for the term of your payout. So you might want to pay extra for a cost-of-living adjustment to keep pace with inflation.

Similarly, some policies allow you to adjust the benefit as your income grows. But chances are you'll have switched employers several times before you hit peak salary and might work for a company that offers a cheaper group plan.

E-mail Carolyn Bigda at yourmoney@tribune.com.

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