Why You Should Get More Disability Insurance

Buying extra coverage at work can be a good way to supplement what your employer provides free.

I get disability insurance as a benefit at work. I have a chance to buy extra coverage through my employer during open-enrollment season this fall. Should I buy the extra coverage? --J.M., Alexandria, Va.

First see whether you could pay your bills with your current coverage. Mo Vidwans, a certified financial planner in Saline, Mich., recommends having enough disability insurance to cover 60% to 75% of your monthly expenses. But many employer-paid group disability policies cover 60% or less of pretax income, with a monthly cap of $5,000. Benefits are taxable because the employer pays the premiums.

Buying extra coverage during open enrollment can be a good way to supplement what your employer provides free, says Carol Harnett, president of the Council for Disability Awareness. You may be able to boost benefits to about 70% of your income without the monthly cap. This coverage can cost $250 per year or more, depending on the amount and policy details, says Harnett. Benefits aren’t taxable if you’ve paid premiums with after-tax money.

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If your job is very specialized, you may want to get extra coverage on your own. Employer-based coverage typically pays out if you’re unable to work at your specific occupation for two years, and it continues after that only if you can’t do any job that’s reasonable for your qualifications. Outside policies may pay until age 65 if you’re unable to do your specific job.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.