Disability insurance replaces a portion of your income if an illness or injury prevents you from working. Statistics show that roughly one in four workers will experience a disability lasting more than 90 days before they reach retirement age. Despite this, disability insurance is one of the most overlooked forms of financial protection. Without it, a serious health event could wipe out your savings and leave your family in financial distress within months.

There are two main types of disability insurance: short-term and long-term. Short-term policies typically cover the first three to six months of disability, while long-term policies pick up after the elimination period and can last for years or even until retirement age. Most policies replace 60% of your gross income, and benefits may be tax-free if you pay premiums with after-tax dollars. The elimination period is a critical factor. Choosing a 90-day elimination period instead of a 30-day one can significantly reduce your premium, but it means you must have three months of living expenses saved.

When evaluating disability insurance, pay attention to the definition of disability used in the policy. "Own occupation" policies pay benefits if you cannot perform your specific job, while "any occupation" policies only pay if you cannot work at all. Own-occupation coverage is more expensive but far more protective, especially for professionals with specialized skills. Also consider whether the policy includes a cost-of-living adjustment, which increases your benefit annually with inflation so your purchasing power does not erode during a long-term disability.