Carrie Schwab Pomerantz
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Dear Carrie, I'm turning 55 next year and starting a new job. At this age, do I need disability insurance? --A Reader

This is a question more people would be wise to ask. According to the Social Security Administration, a 20-year-old worker has a one in three chance of becoming disabled before retirement. Yet, SSA also reports that only 31 percent of the private sector workforce has long-term disability insurance. These are sobering statistics for anyone who depends on earned income for their livelihood.

Disability insurance provides a portion of your income if you can't work because of an illness or non-job-related injury. To me, being over 50 doesn't lessen the need for it. On the contrary, it may increase it.

Many people in their 50s are in their peak earning years and are building their retirement nest eggs. An extended disability at this time of life could completely derail their financial futures.

So ask yourself, how long could you survive without your income? If you have an emergency fund in place, that would carry you for a while. But what will you do when that's gone? The last thing you want to do is tap into your retirement funds -- that would be raiding your future to pay for the present.

Depending on what your new employer offers, you may or may not need private disability insurance, but it's worth the time and effort to figure it out. Here are some things to help you decide.

Start With Your Employer

If you happen to live in California, Hawaii, New Jersey, New York or Rhode Island, you're in luck. These states (as well as Puerto Rico) require employers to provide short-term state disability insurance.

In some states, it's provided through an insurance company; in others, it's provided by the state and paid for through payroll taxes. On average, benefits are offered for six months, with California providing benefits up to a year. The percentage of salary covered varies by state.

Even if it's not required, many employers (especially large companies) offer some type of short-term disability coverage for a specified period of time -- a few weeks or months and possibly up to two years. With any short-term policy, there may be a waiting period before benefits begin.

Long-term disability is a different story. There's no requirement for employers to provide long-term coverage. If yours does, that's a plus. Long-term benefits begin once short-term benefits run out. Coverage can be anywhere from two to five years, or even up to age 65.

Getting disability insurance through your work is likely your most cost-effective choice because it's purchased through a group plan. An employer may pay the premiums or pass a percentage of the premiums on to you. Even if your employer doesn't specifically offer the insurance, you may still have the opportunity to voluntarily buy into a group plan at significant savings. One drawback is that, should you change jobs, you can't take your policy with you.

Look at All Your Sources of Income

Disability insurance through your work or your state is a step in the right direction, but it's not the complete answer. That's because these policies usually replace only about 55 to 65 percent of your income. Many policies have a benefit cap of around $5,000 per month, so $60,000 a year.

How will you cover any shortfall? Social Security Disability Income (SSDI) currently averages about $1,100 a month (and is very difficult to qualify for). If your spouse has an income or your savings are extensive, that may help. But is it enough?

Consider a Private Policy

If the numbers don't add up, a private long-term disability policy -- which can boost coverage to 80 percent of income -- may be worth the cost.

Besides a bigger benefit, private insurance has the advantage of being portable; you can take it with you wherever you go. Plus, benefits are tax-free as long as you paid the premiums with after-tax dollars.

Also, if you're highly skilled (and can afford it), you might want "own occupation" as opposed to "any occupation" coverage, which means you won't be forced to take a job outside of your area of expertise.

If a private policy makes sense, consider that:

--Policies have a waiting period before benefits start. The longer you wait, the lower the premium.

--A cost-of-living clause increases benefits with inflation, but also increases premiums.

--A non-cancelable policy can't be canceled by the company if you pay your premiums on time, nor can the company change the benefit or the premium.

--A guaranteed renewable policy can't be canceled by the company provided that you pay your premiums on time,  but  the premium can be raised.

Private policies are complicated, so it's best to work with an agent you trust. One last thought: The older you are, the harder (and more expensive) it is to get disability coverage. If you decide it's something you need, do it now.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

COPYRIGHT 2012 CHARLES SCHWAB & CO., INC. MEMBER SIPC

DIST BY CREATORS SYNDICATE, INC.

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Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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