More and more ag employers and workers recognize the need for disability insurance, also known as income-replacement insurance. The reason: they are more likely to be disabled for at least 90 days before age 65 than they are to die. But many of those same workers often are underinsured and don’t realize it.

A big reason that people are underinsured is because employers and employees assume the group disability policy, perhaps combined with Social Security benefits, will replace a person’s full monthly income. It won’t, and the gap is often wide.

So, how much disability coverage do you need?

First, understand that disability insurance, whatever the source, won’t replace all of a person’s pre-tax income. At most, it won’t replace more than 70 percent to 80 percent. As you’ll see later, that’s not necessarily a concern, but it’s worth noting.

Now let’s imagine the unimaginable: Tomorrow you are disabled and unable to earn any wage income for months, perhaps more, maybe even permanently. Would you have sufficient non-insurance sources of income to live on comfortably? Keep in mind, you may have additional expenses with your disability. Sources might include your spouse’s income, investments and savings. If you still have a gap, then you’ll need insurance to fill it.

If the disability is work-related, you may be eligible for workman’s compensation or veteran’s insurance. An auto-insurance settlement might pay for disability resulting from an auto accident. But you can’t count on these sources. Also, Social Security may provide benefits, but qualifications are strict. Some states also provide short-term disability coverage.

Key disability coverage usually is through work, but that’s also where much confusion exists.

Roughly nine in 10 employers sponsor long-term disability insurance, according to Hewitt Associates survey (Money magazine, April 2001) – something that would last you more than a few months, though not necessarily to age 65. But do you know what percentage of your income your employer’s policy would actually replace? Four in 10 workers don’t, found a Consumer Federation of America/American Counsel of Life Insurance study (Business Week magazine, June 4, 2001.)

Be aware that more than half of employers’ group plans require employees to pay the premiums. If you’re not paying premiums, check to see if the employer is paying for the policy. He or she may not be. 

Typically, group policies pay 60 percent to maybe 70 percent of your pre-tax income, but there are lots of cautions when considering this figure.

Some policies cap benefits at 50 percent, and most group policies have a monthly income cap ($5,000, for example.) Also, bonus income usually is not included.

Social Security disability payments that a worker might receive typically offset dollar-for-dollar payments he or she would receive through a group policy. So when adding up your potential replacement income, check to see how the group policy treats Social Security disability income. Individual policies are less apt to offset those payments.

Taxes are another critical factor. If you pay the premiums for the group policy with after-tax dollars, the benefits are not taxable. The same applies to a policy you buy on your own. But the payments are taxable if the employer pays the premiums. Paying taxes on 60 percent replacement income could significantly reduce what’s left.

You may find that you would have an income shortfall if you became disabled. Then you would want to buy a supplemental policy. You may be able to buy this through your employer, where it’s likely to cost 10 percent to 15 percent less than on the open market. You may find the group policy caps monthly income that’s too low for your needs, so you’ll have to buy an individual policy.

And remember, the total from all of your policies can’t exceed 70 percent or 80 percent, so don’t try buying policies from multiple companies in order to receive 100 percent or more.

Another consideration when determining the amount of coverage to buy: A sufficient amount today probably won’t be sufficient years down the road, so consider an inflation rider. 

This column is produced by Financial Planning Associates, and is provided by R. Hutton Cobb, a Wachovia Securities financial advisor in Greenville, N.C.