When you’re dealing with a serious illness or injury, the cost of health care alone is a drain on your pocketbook. But you still need to pay your bills and the cost of food and other necessities, especially if you have dependents. Disability insurance can help by replacing part of your salary while you’re unable to work.

Most policies pay a percentage of your monthly salary up to a specific limit, or cap — for example, 60% of your salary with a payment cap of $10,000.

For example, if you make $2,500 per month, a disability policy with those specifications would pay you 60%, or $1,500 per month.

SAVE FOR A RAINY DAY
Disability policies come with an elimination period: the time between when your disability begins and when benefits begin. Some policies let you start benefits after 30 or 60 days, but their premiums are higher than policies that start benefits after 90 days. The check comes at the end of the month, so a 90-day elimination period will actually deliver the first benefit check four months after your disability begins. In the meantime, how will you pay the bills?

Experts suggest that as part of your overall financial plan you maintain an emergency cash fund that would cover your basic living expenses for three to six months. You could consider any investments as part of that fund, but weigh the consequences before you decide to empty your retirement and college savings accounts. It might be better to set up a separate emergency account.

THE TAX BITE
If your employer pays for disability coverage, any benefits paid to you are taxable. Depending on your tax bracket, you might be living on about 40% of your income.

If that’s not enough, consider buying more disability insurance on your own. Any benefits you receive from a policy that you’ve paid for are income-tax-free.