If you can buy it, an “own occupation” long-term disability policy is best. Own occupation coverage provides protection in the event of a disability that precluded you from earning the salary that you are accustomed to earning. Any benefit payments received will be tax-free, as long as you paid the policy premiums yourself and did not deduct them. If you’re insured through your employer, benefits are generally taxable to you. It’s very important to have an inflation rider on your policy.
Many employer-sponsored group long-term disability policies provide coverage in your “own occupation” for a limited period of time, sometimes only two years. After two years, coverage is limited to “any employer” who would pay you for working. Disability payments under group policies are often reduced by income from other sources, including Social Security and private-pay policies.
If your savings can sustain you for three months, you can choose a 90-day waiting (“elimination”) period on your disability policy. Benefits will start on the 91st day. Make sure that you can afford to fund your lifestyle for three months until the insurance payments begin.
If you are thinking about switching to a new long-term disability policy, make sure you’re approved with the new company before canceling your existing coverage.