Disability insurance should be one of the key components of any sound financial plan. Unfortunately, however, many Americans have not secured this vital protection to step in when illness or injury prevents them from working. The bottom line: A disabling illness or injury stops income, imposes additional costs, and prevents building a retirement nest egg.

Disability insurance replaces lost income when an individual is unable to work because of an accident or illness. Some individuals may be covered under a group disability income insurance policy through an employer or eligible for disability benefits through work, the government, or other programs. Some even may have access to additional sources of income in the event of a disability, such a spouse’s salary, savings, investments, or even help from family members.

However, this still may not be enough to pay for living expenses on a long-term basis. This is particularly true for professionals, such as physicians and others, who have high incomes. Without disability coverage as part of the financial planning puzzle, the result can be devastating, depleting the savings accumulated for a child’s education or for retirement. The disabled individual who was once the breadwinner becomes the dependent.

What to look for in a disability income policy

When speaking with a professional advisor on the type of disability insurance policy that is right for an individual, there are certain key issues that should be addressed. First, be sure to find out how the term “disability” is defined in the policy. There are policies that provide benefits only if and when the individual cannot complete the duties of any occupation for which he or she is reasonably qualified to do based on training, experience, and education. There are other policies that will pay benefits if the individual cannot perform the major duties of his or her occupation. This will make a difference, especially for professionals such as physicians.

In addition, be sure to discuss with an advisor the features of each policy being recommended, including:

Benefit amount
Elimination period (which is the waiting period before the benefits kick in)
Length of the benefit period
Type of benefits for partial disability
Provision for recurrent disability (a relapse)
Cost-of-living adjustments and the ability to purchase additional coverage

Have the advisor provide an outline of the coverages recommended so that a side-by-side comparison can be made of the features for each policy proposed. Policies have different waiting periods – for example, some have 90 days, while others have six months or even longer. Most policies will not impose a second waiting period if a relapse occurs within a specific time. In addition, most individual disability income policies are non-cancellable or guaranteed renewable. With a non-cancellable policy, premiums cannot be increased. Under a guaranteed renewable policy, premiums cannot be increased based on an individual circumstance, but they can be raised for an entire class of policyholders.

A professional advisor will be able to address each of the critical features within the various policies available and the benefits of having disability income insurance as part of an overall financial planning strategy.