Importance of disability coverage

Lots of people have life insurance (and that is certainly a good thing...) but very few people carry disability insurance. A recent study by Northwestern Mutual indicated that just 10 percent of people over age 21 have purchased a disability policy.

That statistic is pretty surprising since the average adult much more likely to suffer a disability than to die. According to the Social Security Administration, three out of every 10 workers entering the workforce will become disabled at some point in their careers.

And this disability can have a huge impact on how well prepared a person is for retirement. Another report from Northwestern Mutual shows that over $1M in retirement assets can be loss if a 50 year old suffers a two year disability and does not have disability insurance. The same person with disability coverage loses much less -- only about $230,000.

So, what is the best way to get disability insurance? Most larger employers offer short and long term disability coverage to their employees and they offer (generally) very affordable rates. If your employer offers this coverage, you should strongly consider it and be sure to ask if you have the option to pay the premium with before tax or after tax dollars. It might seem like paying the premium with before tax dollars is the way to go but it is actually better to pay with after tax dollars. If you pay with after tax dollars, any benefit you may receive in the future will be tax free. If you paid the premiums with before tax dollars, any benefit would be taxable.

If you are self employed or want to get an individual policy, you should expect to pay significantly higher premiums.