Disability and Umbrella Coverage -- The Policies People Overlook

Disability Insurance -- Protecting Your Paycheck

Most people insure their home and their car but not their ability to earn a living, even though their income is usually their most valuable asset. Disability insurance replaces a portion of your income if you become unable to work due to illness or injury. According to the Social Security Administration, more than one in four 20-year-olds will experience a disability lasting 90 days or more before reaching age 67.

There are two main types. Short-term disability covers the first few weeks to months of a disability, typically replacing 60-70% of your income. Long-term disability kicks in after the short-term period ends and can last for years or until retirement age, depending on the policy. Many employers offer one or both as a benefit, sometimes at no cost to the employee.

Key details to review in any disability policy: the definition of "disability" (some policies only pay if you cannot do any work at all, while others pay if you cannot do your specific occupation), the elimination period (how long you must be disabled before benefits begin, often 90 days), and the benefit period (how long payments last once they start). The difference between an "own occupation" and "any occupation" definition can be significant, especially for people in skilled trades or specialized professions.

Umbrella Insurance -- Extra Liability Protection

An umbrella policy is a type of liability insurance that goes beyond the limits of your homeowners or auto policy. If you are found responsible for an accident that causes injuries or damages exceeding what your standard policies cover, the umbrella policy picks up the rest, typically in increments of $1 million.

Here is a scenario that illustrates why it matters: you cause a car accident that seriously injures someone, and the medical bills, lost wages, and legal judgment total $800,000. If your auto policy only covers $300,000 in liability, you are personally responsible for the remaining $500,000. Without an umbrella policy, that could mean liquidating savings, selling assets, or having wages garnished.

Umbrella policies are relatively inexpensive for the amount of coverage they provide -- a $1 million policy often costs between $200-400 per year. They are generally available from the same company that provides your home or auto insurance. To qualify, you typically need to carry minimum liability limits on your underlying policies first.

Who Might Want to Consider These

Disability insurance is generally most relevant for anyone whose household depends on their income and who does not have enough savings to cover months or years of lost wages. Umbrella insurance is generally most relevant for people who own property, drive regularly, have a pool or trampoline, host events at their home, or have assets they want to protect from a lawsuit. Neither is required by law, but both address risks that can be financially devastating when they occur.