A users' guide to disability insurance.

Most workers need disability insurance but few actually invest the time and effort to determine whether their existing coverage is sufficient.

This simple guide will help you to determine if your policy will adequately provide for you and your family in the event of your disability, or if additional planning is required to avoid a potentially devastating loss of income.

Disability insurance simply replaces a portion of your income if you become disabled and are unable to work. The terms by which that income will be replaced, however, are anything but simple.

Long-term disability insurance generally includes an elimination period, or a period of time (often 90 days) before benefits will be paid. During this elimination period, a short-term disability policy may provide needed income. Workers not covered by a short-term policy should ensure that adequate financial resources will be available to pay bills during the elimination period. These resources may include your emergency fund or an existing home equity line of credit.

Long-term disability insurance provides benefits for a certain period of time. The term of your policy may be as short as two years or as long as the number of years until you retire. Every policy is different and it is important to know the terms of your coverage in order to plan for any shortcomings and supplement coverage when necessary.

Another important aspect of your coverage is how a disability is defined. Some policies will only pay benefits if a worker is unable to perform the duties of any occupation. By this definition, a highly skilled, highly paid surgeon who is unable to perform the duties of her occupation but could perform the duties of a customer service representative would not receive benefits.

A more ideal definition of disability will pay benefits when the worker cannot perform benefits of her own occupation. It is also important to evaluate the term of the definition of disability. Often, policies will pay benefits based upon one definition for 2-5 years and then will only pay benefits if the worker cannot perform duties of any occupation after the initial period has ended.

Disability insurance replaces a percentage of your income. Generally, policies will provide about 60 percent of your average salary. This may or may not include bonuses and the coverage is generally subject to a maximum benefit which may be substantially less than your actual income. These benefits are also likely to be offset by other benefits you may receive, such as Social Security Disability benefits.

Another very important consideration is whether or not your benefits will be taxable or tax free. A tax free benefit equal to 60 percent of your salary will go a lot further toward making ends meet than the same benefit reduced by taxes. If you pay your own premiums for disability insurance, your benefit will be tax free. If your employer pays the premiums, the benefit will be fully taxable.

Group policies are often quite inexpensive (but you must be careful to know the terms!). If your employer provides group disability coverage at no cost to you, it might be worth asking if you can pay the premiums yourself. Individual policies will certainly allow you to pay the premiums yourself, sometimes provide better coverage, and are "portable" should you lose your job or change employers.

A worker should also determine whether or not the amount of the benefit provided will be adjusted annually for inflation. If a cost of living adjustment is not provided, the amount of purchasing power of the benefit will likely be reduced each year as the cost of goods and services increase.

It's a worthy investment of time and effort to understand the terms of your policy and plan for any shortcomings that may exist. Should you need to purchase additional coverage, a qualified financial advisor or an independent insurance broker should be helpful in securing a policy that will suit your individual needs.