Disability insurance is perhaps the most frequently overlooked, but necessary type of insurance.  A disability policy can replace a portion of one's income if due to an illiness or injusy, a person is unable to return to their regular occupation.  The premiums for these types of policies are based upon your current occupation, age and health, and the chosen amount of monthly income benefits and length of time before the benefits begin. 

There are a few ways to obtain this coverage.  One way is if your employer offers it through a benefit package at your job.  The other way is to purchase the coverage yourself individually.  Either way you should have the coverage.

There are two types of disability, short term and long term disability:

Short-term disability - This coverage replaces a portion of lost salary in the event the policy owner misses six months or less of work. The coverage typically begins after all sick leave is exhausted, and replaces close to 100% of wages for the first payouts. If the policy owner remains unable to work, however, the payments will eventually drop, often to 60% of wages. The length of coverage and payment percentages vary from plan to plan, but these numbers are typical.

Long-term disability - Some experts contend that long-term disability insurance is the most important insurance you can purchase. This can be partially attributed to advances in medical care; some diseases and injuries are now disabling rather than deadly, meaning that the incapacitation can be lengthy.

Typically, long-term disability insurance can be purchased to replace 50-70% of salary. Some employers allow employees to purchase extra insurance from the same company, sometimes raising the total to 80%. Note, however, that some policies have monthly maximum payouts, which may reduce the actual percentage of salary the policy owner receives. The "salary" is set at the time the policy is purchased, and you will likely want to increase the value of the plan as your compensation increases. Some plans only allow increases with a physical, some allow increases without a physical for the first few years of the plan, and some have other rules; check the plan for its particulars.

Long-term disability policies vary in the length of payout: some policies will only pay out for 5 or 10 years, some will pay out until age 65. Experts recommend the latter. Policies also vary in definition of disability (some contentious categories include mental illness and back injuries) and exclusionary criteria (pre-existing medical conditions, injuries from dangerous activities, etc.).

Policies can be 'guaranteed renewable' and 'non-cancelable.' Guaranteed renewable means the insurance company cannot drop the policy, unless premium payments are skipped. Non-cancelable means the insurance company can never raise the premium on the policy. Both are desirable, but non-cancelable is usually best.

Riders to consider:

There are a few important policy options (or "riders") that should be considered: "residual benefits" and "cost of living" (COLA). The residual benefits rider provides the difference between old and new salaries, in the event that the policy owner can get a new job, but not one with the same salary as his old one. The cost of living rider allows the policy's value to increase with inflation.

Finally, a disability policy can be designated as an "own-occupation" policy. Most policies are "any-occupation," which means the policy owner must work when he is capable, even if not in the same capacity as before. An "own-occupation" policy will allow the owner to collect benefits until he can resume the previous occupation. Typically, these policies are more beneficial to policy-owners with high-skill or high-paying jobs.