How to pick a disability insurance plan - MarketWatch

By Anya Martin, MarketWatch

DECATUR, Ga. (MarketWatch)—Disability insurance isn't on the radar for most Americans, but many workers may come to rue that lack of awareness.

Here's why: One in three employees aged 35 to 65 will be out of work due to injury or illness for three months or more at some point in their career, according to the Social Security Administration.

If you couldn't work, how long would it be before your savings are depleted and you start to dig yourself into debt? If the answer is troubling, you may want to consider a disability insurance policy for financial protection.

Problem is, shopping for one can be a frustrating and confusing task. Here are some basic tips to get you started.

1. Do I need disability coverage?

Disability can happen to anyone unexpectedly, and it's likelier to be caused by illness than injury, said Barry Lundquist, president of the Council for Disability Awareness, a nonprofit organization of insurance providers who represent 75% of the commercial disability-insurance market.

"People generally first think of disability in terms of catastrophic causes—a car accident that leaves one a quadriplegic in a wheelchair or very serious one-time events such as strokes or heart attacks," he said. "Those things do cause disability, but a lot of claims are caused by fairly common, more chronic stuff."

Diseases of the musculoskeletal system and connective tissue ranked highest, accounting for more than 30% of disability claims to CDA member companies in 2010. Ailments included arthritis, herniated or degenerated discs, back pain and spine or joint disorders. Next on the claims list were nervous-system and sense-order diseases (13%), circulatory system diseases (13%) and cancer (8%).

"The whole purpose of insurance is to protect people against catastrophic risk, the kind of risk that can financially devastate you," Lundquist said. "You may be able to afford to replace a lost cellphone, but [one's] income is almost everybody's most valuable resource."

Disability policies come in two main types. Short-term disability insurance, which includes many employer-provided group plans, generally only provides financial protection for three months to two years. The most sought-after long-term disability plans have benefit periods that last until age 65 when Social Security and retirement plans kick in.

2. Am I eligible for a group plan from my employer?

Find out whether you have access to coverage in a group plan through an employer, trade association or other group. If you've already opted for this benefit, is the coverage you have sufficient and are there restrictions on that plan?

For most Americans, shopping for an independent policy is the only option. Only 32% of working Americans have access to a group disability insurance plan through their employer, according to the U.S. Bureau of Labor Statistics.

Among those employees who do have coverage, fewer than half said they knew its cost (41%) or what benefits it provided (47%), according to a recent national survey of about 1,200 workers commissioned by the Consumer Federation of America and employee benefits provider Unum.

If your employer doesn't offer group disability, team up with fellow employees to petition to have group disability added to the benefits package, said Stephen Brobeck, CFA's executive director. Especially if employees are willing to pay a full premium, many companies will be willing to consider it, he said.