Have you thought about how you would pay your bills if you were physically unable to work? Short- and long-term disability insurance protects your income-producing ability when you're unable to work due to illness or injury.

Many employers provide group disability insurance as a benefit at little or no cost to employees. If there's a cost for the coverage, it's usually paid with pretax dollars and is much less than you'd pay for an individual policy. Be aware that many employers only provide short-term disability coverage. When you have both coverages through your employer, the policies often dovetail so that your long-term coverage would pick up as soon as your short-term coverage expired (if your disability lasted that long).

The Purpose of Disability Insurance

Ironically, although the likelihood of becoming disabled is greater than the likelihood of dying during any given period of time, more people buy life insurance than disability insurance. Your greatest asset is your ability to generate income. Shouldn't you insure it? Don't make the mistake of thinking that you're too young or healthy to require disability insurance.

While it's true that your chances of experiencing a period of disability are greater as you get older, illness and accidents can happen to you at any age. You could suffer a sports injury, a back injury, or an injury caused by a car accident. You could come down with mono and be out of commission for a few weeks or months.

Before purchasing an individual disability policy, be sure you understand the terms used and read the policy carefully to make sure you know what benefits you're getting. Find out what, if any, exclusions there are, what the elimination period is, what the benefit period is, and what the definition of total disability is.

Elimination and Benefit Periods

With both types of disability insurance, there's an elimination period, which is the period of time after you become unable to work before you can begin receiving benefits under the policy. A short-term disability policy may have an elimination period of one to two weeks for illness or a shorter time for accidents. Long-term disability elimination periods are typically at least thirty days and more commonly ninety days.

If you become disabled, you'll receive benefits until you recover or reach the maximum benefit provided by your policy. Short-term disability policies pay benefits for a shorter period of time, from six weeks to two years. Long-term disability policies pay benefits for several years or until the age of sixty-five (or longer). The shorter the elimination period and the longer the benefit period, the higher the premium will be. Most policies replace only 60 percent of your income, up to a maximum of $5,000 to $10,000 per month.

Definition of Disability

The best policies will have a definition of disability that includes the inability to perform the major duties of your own occupation. Under these policies, if you're unable to perform your major duties, you can go to work in a different occupation that you are able to perform and still collect your disability pay.

Less expensive or lower-quality policies won't pay benefits unless you're unable to do any work you're reasonably suited to do, or they'll offset your monthly benefit check against any income you're earning elsewhere. Read the fine print!

There are three types of long-term disability policies.

• Noncancelable and guaranteed renewable: The insurance company guarantees that you'll be able to renew the policy for as long as you wish at the same premium and for the same monthly benefits, regardless of any changes in your occupation or income.

• Guaranteed renewable: The insurance company can't drop you but it can raise prices.

• Conditionally renewable: The company can decide not to renew your policy, perhaps when you most need it, or it can raise prices and add conditions at any time.

Obviously, noncancelable and guaranteed renewable is the best type but will also be the most expensive. Avoid conditionally renewable policies. You want to have the assurance that your coverage will be there when you need it. Buy residual disability benefits. This means if you aren't totally disabled but can't work full-time, you'll be paid partial benefits.

Expect to pay between 1 and 3 percent of your annual income for a long-term disability policy, so if you're earning $30,000, a policy will probably cost you between $300 and $900 a year. Your cost will depend on your age and the policy features you choose. The average period of disability is about three years.