If you are concerned about safeguarding your income for yourself and your dependents, consider the following two policies:

Life insurance, which pays your financial dependents a sum of money in the event of your death, and

Disability insurance, which pays you a monthly income if you’re unable to work for an extended period of time due to an accident or illness.

You may need to buy more life insurance

If a divorce has made you the main breadwinner for one or more financial dependents, you may need a bigger life insurance policy. You may also want additional coverage for your former spouse, if you still rely on his or her income for child support. Consider having your separation agreement or divorce settlement stipulate your former spouse must maintain a life insurance policy to replace child support payments if he or she dies.

Almost certainly, you should change your beneficiary

Most people name their spouse as their primary life insurance policy beneficiary. If you don’t change that designation, your former spouse will continue to be your primary beneficiary whether or not you are married. You may name a new beneficiary by contacting your insurance company. (While we’re on the subject, you should review the beneficiary designations on all your retirement accounts, bank accounts, investment accounts, other assets and on any group insurance you may have through your employer, for the same reason.)

What is Disability Income Insurance?

A disability income insurance policy is a contract between you and an insurance company. You pay a periodic premium, and in exchange the insurance company promises that if you cannot work because you are disabled, it will pay you a percentage of your lost income.

Do you need it?

Although many people own life insurance because they’re aware of the risk of dying, most people ignore the risk of disability. Yet in fact, disability is a greater risk for young people: between the ages of 25 and 55, you’re more than twice as likely to become disabled as you are to die. Think for a moment about the financial impact on your life if you were unable to work. Could you live without your salary for six months, a year -- perhaps longer? If not, you need disability income insurance.

What determines if you are disabled?

The policy’s definition of disability is what determines whether or not you are eligible for benefit payments. The policies that provide the broadest coverage define disability as your inability to perform the duties required by your own occupation. A brain surgeon with this type of policy would receive benefits if he couldn’t perform surgery, for example, even if he could earn a living as a medical school professor. The policies that provide the narrowest coverage define disability as your inability to work in any job at all. Of course, the broader the coverage, the more expensive the policy.

How much do you need?

Insurance companies don’t sell disability policies that replace 100 percent of your salary. If they did, they fear you’d have no economic incentive to go back to work! Expect to find coverage available for 60 to 70 percent of your income. Unless you have substantial other sources of income -- from an investment portfolio, for example -- it makes sense to buy as much coverage as you can afford.

Your chance of becoming disabled is greater than you probably realize. It’s a sobering fact: If you are under 65, your chance of becoming disabled for 90 days or longer is twice as likely as your chance of dying. If you were unable to work for a few weeks, months or even years, would you be able to manage financially?

Thinking Social Security? You may want to think again...

Social Security doesn’t provide adequate coverage, in most cases. Social Security does pay some disability benefits -- but qualifying for them is much harder than most people realize. Social Security typically pays disability benefits only if you are diagnosed with a fatal illness, or if your physical or mental disability makes you unable to do any kind of work for at least 12 months. Even then, you won’t receive any Social Security payments for the first six months after you become disabled. That’s not much of a safety net. You’d have a great deal more protection with your own disability insurance policy.

Your disability benefits could be tax-free

Usually, if you pay for disability insurance with after-tax dollars, any benefits you receive will be tax-free. Since taxes won’t be taken out of your disability checks, you don’t need to replace 100% of your gross income. (That’s good, because insurers don’t sell policies that replace 100% of your income; most disability coverage replaces only up to 60% - 70% of your gross income because insurance companies want you to be motivated to get well and return to work).

Prioritizing your expenses is the first step

Before deciding how much disability insurance you need, spend some time thinking about what makes up your monthly expenses. In addition to the basics (food, shelter, clothing), what other expenses must you cover? Which expenses would increase if you were disabled? Which would decrease? And what non-salary income could you count on -- from savings or investments, or from an employer-sponsored group disability policy, for example?