Life and Disability Insurance Plans

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What would happen to your family if you suffered a serious injury and could not work for a year or longer? What if you unexpectedly died? Would your family be taken care of financially?

The best way to ensure this is to have disability and life insurance. The good news is that many companies with more than 500 employees offer both disability and life insurance options as a benefit.

Your job? You need to analyze these benefits to make sure they are worthwhile.

Disability insurance

Too many employees give little thought to disability insurance. They may have taken out large life insurance policies. But what if you are simply disabled and can't work? How will your family cope financially if you're the main source of income?

This is where disability insurance comes in. This insurance will pay a portion of your salary - often 60 percent of it - if you are disabled and can't work. Receiving, a portion of your income isn't as good as receiving all of it, but even receiving a percentage of your regular income might be enough to keep your family financially afloat until you can return to work.

Don't think you'll suffer a disabling injury? A survey by Sun Life Financial found that people are three times more likely to suffer a disability or injury that keeps them out of work for a year before they hit age 65 then they are to die. This means that disability insurance is every bit as important as life insurance.

Fortunately, many employers offer this benefit. Unfortunately, many workers pass on it. According to the Sun Life study, just three out of every 10 employees has taken out disability insurance.

How disability insurance works

If you sign up for disability insurance from your employer, your company will take out a portion of your regular paycheck to cover the costs.

If you are injured and can't return to work for an extended time, your disability insurance will kick in.

In general, there are two types of disability insurance offered by employers. Short term disability insurance usually kicks in within 14 days of your disability. This insurance provides coverage that can last from six months to a year. Long term disability insurance then takes over after this period.

Your employer's disability insurance will come with certain restrictions. First, the insurance will only cover a portion of your salary. That number varies, but many plans provide disabled workers with 60 percent of their salary.

Some plans will provide a percentage only of your salary. Others will provide a percentage of both your salary and any bonuses you earn. Very few plans will allow you to contribute to your 401(k) while disabled.

Some disability plans will come with a monthly cap on how much coverage you can receive. If you are paid a high monthly salary, you might feel some financial pain here. If you make $20,000 a month in income and bonuses, but your disability plan provides a maximum of $10,000 a month in benefits, you will have to adjust your spending patterns until you are able to return to work.

Life insurance

Many employers also offer their own life insurance benefits. You'll be the one to decide whether your company's life insurance is worth your investment.

Company life insurance plans typically offer either a flat fee in case you die - say $70,000 - or a multiplier of your annual salary. Your company's life insurance plan might pay out two times your annual salary. If you earn $60,000 a year, your company life-insurance plan would pay out $120,000.

There are two main questions you'll need to ask before investing in a company life insurance plan: is it worth it, and is it portable?

A company life insurance plan might not provide enough protection for the investment. It often makes more sense for employees to rely on life insurance purchased from outside companies. Most employees who do take out company-sponsored life insurance plans do so as a supplement to their main life insurance.

Portability is also an important issue. You want to make sure that if you leave or lose your job, you can keep your life insurance benefits. Some policies offered by companies do not allow their holders to take theirs along if they find a new job or lose their current one.

Like all employee benefits, you need to carefully analyze your company's disability and life insurance options. By doing the research, can you make the decision of whether these plans are a worthy investment.