How can disability insurance help?

Disability insurance helps replace your income if you become sick or hurt and are unable to work. There are two basic types of disability coverage: (1) short term, which usually pays a benefit for six months to two years, and (2) long term, which pays for at least a year, but often lasts until age 65 or for life. Benefits vary, but in general, long-term disability policies obtained through work pay 60 to 70 percent of your income if you are disabled and can't work. Individual policies generally pay a specified amount, and short-term disability policies typically pay a percentage of income with a much lower maximum benefit than long-term policies. Short-term disability insurance is seldom available on an individual basis. 

A policy's definition of disability is also important. Some policies indicate you will be considered disabled if you cannot work in your own occupation. Others will pay only if you cannot work in any occupation. And a few will pay partial benefits if you have a reduction of income. There are many variations in the definitions of disability, so read the policy carefully and ask questions for clarification.

How can I get disability insurance?

Your employer may offer disability coverage at work. As an employee, you generally can get this group coverage even if you have arthritis. If the employer pays the premium, you must pay taxes on the benefits if you receive them. You also can try to buy an individual disability insurance policy, but it may be difficult to find a company that will insure you because of your arthritis. Generally an insurance company will exclude benefits for disabilities caused by any pre-existing conditions. When you pay the premiums for a disability policy, you receive benefits tax free.

Other Sources of Money

If you need alternative sources of money, here are a few places to look:

• Life insurance. If you have a cash-value insurance policy, such as a whole life or universal life policy, you may be able to use the cash value to get a loan from the insurance company. You also may be able to withdraw some of the cash value of the policy. (Term insurance does not have a cash value.) Before taking these steps, make sure you understand all the requirements and ramifications associated with using your life insurance as an alternative source of money. Also note that if you are disabled you may qualify to have the premiums on your policy waived as long as the disability continues. Check your policy for a rider that provides this benefit and read the definition of disability carefully. There are other ways of getting additional cash from your life insurance policy but there are restrictions and potential tax consequences associated with them. Consult a tax advisor or a financial planner before proceeding with these methods. 
   
• Reverse mortgage. If you are at least 62 years old and own your home (or nearly own it), you may be able to convert part of your home's equity into cash. In general, a reverse mortgage is a loan against your home that doesn't have to be paid for as long as you live there. It can be an expensive type of loan, however, and may also affect whether you qualify for some government programs. Before deciding on a reverse mortgage, talk with your financial advisor. Many nonprofit consumer groups, such as AARP, offer education classes about reverse mortgages.
   
• Retirement plan. You may be able to borrow against your retirement plan at work to pay for a "hardship," such as a major medical bill. If you become permanently disabled, you can withdraw the funds in the retirement plan without paying any penalties. However, the money you receive will be subject to income tax and may affect your ability to receive government assistance.

©2001. National Endowment for Financial Education. All rights reserved.

Note: Certain content areas in this material are current as of the publishing, but legislative and regulatory changes as well as new developments may date this material over time. This content is meant to provide general financial information; it is not meant to be a substitute for or to supersede specific professional or legal advice.