After Jonathan Lacefield of Marietta, Ga., bought disability insurance, he figured that if he ever became unable to work due to illness or injury, he and his family would be in decent financial shape.

But when he factored in retirement, he became alarmed.

His disability policy would replace about 60% of his income until age 65 -- a standard arrangement. While that would be enough to cover his family's daily needs, "we wouldn't be able to fund my retirement account at all," says Mr. Lacefield, who works as a management consultant and whose wife, Misty, stays home to care for their son.

So last year, Mr. Lacefield bought retirement-contribution protection, a type of insurance attracting more interest in financial-planning circles.

With traditional pensions disappearing from the workplace, employees must depend on 401(k)s and related defined-contribution plans to support them in retirement. But if a disability limits a person's ability to fund such a plan, a nest egg could suffer in the long run. That's where retirement-contribution protection comes in. It's designed to continue funding an individual's retirement if he or she should become disabled for a year or two, or permanently.

"Anyone [with] a defined-contribution plan should consider this, unless they are independently wealthy," says Clark D. Randall, a financial planner at Lincoln Financial Advisors in Dallas.

The coverage was introduced in the mid-1990s, when insurers started cutting back on standard disability benefits. Until that point, many policies offered lifetime payouts. "But insurers have been cutting benefits so that they typically only pay until age 65, Mr. Randall says, "leaving many people vulnerable in retirement."

Falling Short

Before diving into retirement-contribution protection, a person should first get standard disability coverage, says Christopher Cordaro, a financial adviser at RegentAtlantic Capital, a financial advisory firm in Chatham, N.J.

If you are unable to work for any amount of time, standard disability insurance will help you continue to care for dependents, make mortgage or rent payments, and meet other needs. Standard coverage typically is available through an employer's benefit plan, and can be supplemented with individual policies.

But even with supplemental coverage, many people don't realize how little they will receive from a standard policy -- even before taking retirement savings into account.

Insurers have caps on how much income they will pay out each month under regular disability coverage. Someone earning $30,000 a year may be able to replace well over 75% of income, says John Ryan, owner of Ryan Insurance Strategy Consultants in Greenwood Village, Colo. But coverage for high earners could replace as little as 40% of one's salary, he says.

Those who earn extras at the office also may come up seriously short in disability coverage. Policies often are tied to base salaries and don't factor in bonuses, stock options and commissions, says Barry H. Kaplan, a financial planner at Cambridge Southern Financial Advisors in Atlanta.

People opting to get retirement-contribution protection to prevent a gap in retirement funding usually have to seek out individual policies from the handful of insurers offering such coverage. These include Berkshire Life Insurance Co. of America, a subsidiary of Guardian Life Insurance Co. America; MetLife Inc.; Massachusetts Mutual Life Insurance Co.; and Principal Life Insurance Co., owned by Principal Financial Group .

In some cases, people can get coverage through an employer. International Business Machines Corp. is one of a few large companies that offer the benefit -- it started doing so in 2005. Other employers with retirement coverage include small law firms, architects and other professional groups, according to Unum Group, a Chattanooga, Tenn., insurance company that offers group disability-insurance plans.

How it Works

As with all insurance, be sure to understand how retirement-contribution protection works so you can better match a policy to your needs.

To start, coverage can be sold either in a stand-alone policy or as a rider to a regular disability policy. In judging eligibility, most companies -- Principal is an exception -- require that you're already contributing to a defined-contribution plan, such as a 401(k), individual retirement account, employee-stock ownership plan or simplified employee pension. Insurers generally match your coverage to your previous year's contribution. You also can get coverage for any employer match you were receiving on your 401(k) contributions.

With group policies -- those you would get through an employer -- contributions continue to be made, in most cases, directly into an employee's 401(k) plan or annuity.

With individual policies, though, your insurer sets up an irrevocable trust in your name if you become disabled. Contributions to the trust usually begin six months to a year after a person becomes disabled, depending on the policy, says Mr. Ryan of Ryan Insurance Strategy.

Investment choices within the trust itself depend on the insurer. For example, Berkshire's policies allow you to invest as you would in a regular brokerage account. At Principal Financial, policy holders have a menu of mutual funds to choose from.

With the trust, any distributions of investment interest, income or capital gains are subject to taxes and must be paid annually -- even though the interest, income and gains are reinvested in the trust. The taxes are paid by the trust out of assets it has accumulated.

To keep taxes to a minimum, you can choose tax-efficient investments within the trust, says Mr. Kaplan, the financial planner in Atlanta. Or you may defer taxes by investing in an annuity within the trust, he says.

Depending on the policy you choose, contributions to the trust may be fixed or adjusted upward when the maximum contributions to defined-contribution plans are raised.

At retirement age -- anywhere between 65 and 70, depending on how a policy is set up -- you have the choice of withdrawing your savings in a lump sum or arranging a lifelong annuity. Under either option, because you would have already paid taxes on distributed interest, income and gains, you would owe taxes only on capital gains that are being realized for the first time. If you buy an annuity within the trust, gains are subject to income taxes upon withdrawal from the annuity.