What is Disability Insurance?

Disability insurance is like keeping a frozen pizza in your freezer…

You pride yourself on making a home-cooked meal for your family every night. But to plan for those nights where you just don’t have the time, you keep an extra frozen pizza in the house. Earning income is similar, where you hope to always be able to work to earn an income. But on the off-chance that something goes wrong, you want to have a back-up plan in place.

Disability insurance is a type of policy that replaces some of an individual’s income if they can’t work due to covered illness or injury. Some disability insurance policies replace someone’s income temporarily while they heal or recover. These policies generally provide coverage for just a few months to up to two years.

Other policies may provide income to someone for the rest of their working years until they reach retirement age. Many employers offer disability insurance as a benefit to employees. The federal government also has a disability insurance program for those unable to work.

Short-term disability insurance is a type of insurance that can replace someone’s income if they’re temporarily unable to work. These disability plans provide coverage from anywhere between a few months and two years, though the average is about 26 weeks. Benefits are paid as a percentage of the individual’s salary — usually between 60% to 75%. Policies usually have a waiting period of 7-14 days before a participant can begin receiving benefits.

It’s important to note that employers don’t necessarily have to hold someone’s job while they’re on short-term disability leave. The exception would be an employee covered by the Family and Medical Leave Act (FMLA) or the Americans with Disabilities Act (ADA). But those employers who do hold someone’s position may also choose to allow them to use paid sick time to supplement their disability pay, as long as the total benefits the employee receives don’t exceed 100% of their normal pay.

Long-term disability insurance is an insurance policy that provides income replacement for individuals who are out of work longer than short-term disability will cover. Some of these policies cover someone for 24-36 months. In other cases, such as with Social Security Disability Insurance (SSDI), the benefits can last until the individual reaches retirement age. Supplemental Security Income (SSI), another program run by the Social Security Administration, will also provide long-term coverage. But with this program, the monthly payments will only provide enough to cover basic needs such as food and shelter.

As with short-term disability, long-term disability insurance coverage doesn’t require an employer to hold someone’s position. Often the amount of work someone misses while on long-term disability exceeds the number of months that laws such as FMLA or ADA would require a company to hold someone’s job.

What disability insurance covers will vary with the type of policy you have. In general, there are two different types of coverage you can purchase.

Own-occupation disability insurance covers you if an injury or illness prevents you from working in your current role. For example, suppose you’re a surgeon and a hand injury prevents you from working. Technically, you could still work at a job that allows you to sit at a desk. But if you have own-occupation disability insurance, you get the benefits if you can’t perform surgery.

Any-occupation disability insurance covers you if, for some reason, you can’t work at all. This type of insurance tends to be cheaper, since the chances of you being unable to work in any capacity are generally smaller. But it’s also a lot harder to claim.

The amount you’ll pay for disability insurance will vary depending on several factors. The most important factor is your occupation — Some jobs will be more expensive to insure than others. Your age. Insurance companies know that young people are less likely to become sick, meaning younger individuals will usually pay less for disability insurance. Your health history is another critical factor in the cost of disability insurance. Those with preexisting conditions or chronic illness may pay more or likely not even be able to qualify. You may also be able to adjust your contract so that you don’t pay more for those conditions, but then you can’t claim the insurance if a preexisting condition leads you to miss work.

Other factors that go into how much you’ll pay include your benefit amount, your benefit period, and the elimination period. In general, the price will increase as your benefit amount increases. Similarly, you’ll pay more for your insurance for a longer policy. The elimination period, which is the amount of time you must be off work before the insurance kicks in, can increase or decrease the price as well. The shorter the elimination period, the greater the cost.

Ultimately, if you want a policy that covers 60%-80% (typically the maximum allowed) of your gross income (meaning before taxes come out), you can expect to pay between 1% and 3% of your current income toward disability insurance premiums. Depending on how you pay for your insurance, disability benefits may or may not be tax-exempt, If they are tax-exempt, then 60%–80% of your gross income will end up being roughly the same as your current take-home pay.

If you’re a young and healthy individual, disability insurance might seem totally unnecessary. But, as with any type of insurance, you’re deciding whether to pay to mitigate a potential risk. According to data from the Council for Disability Awareness, a 30-year-old man doing a job with physical labor has a roughly 50% chance of a disability of some type before the age of 65. For a 20-year-old woman working at a desk, your chances are still more than 20%.

The most common causes of disabilities for these individuals include muscle, bone, and joint conditions, cancer, poison, heart and blood conditions, mental health disorders, nervous system disorders, and other injuries.

A disability can take a huge financial toll on a family. Not only do you risk losing your income, but you also may be stuck with extra expenses as a result of medical care. If you have financial obligations and don’t have enough money in savings to replace your income for any significant period, then disability insurance might be worth the money.

Many people receive disability insurance through an employer. California, Hawaii, New Jersey, New York, and Rhode Island all require companies to offer some sort of short-term disability coverage to employees. And in other states, many employers willingly choose to do so. And while no states require employers to provide long-term disability insurance, some companies do. The employer might pay some or all of the premiums, depending on where you work.

If your company doesn’t offer disability insurance or you’re self-employed, there are still options available. First, you can choose to purchase a private disability insurance plan directly through an insurance company. There are special insurance programs available for the following individuals:

• Veterans
• Civil servants
• Miners
• Union members

If your employer doesn’t offer disability insurance and an injury or illness prevents you from working, you may also be able to receive benefits from the Social Security Administration. Social Security Disability Insurance (SSDI) provides coverage to individuals who can no longer work, but have previously worked and paid Social Security taxes. Supplemental Security Income (SSI) provides benefits to individuals who are either retired or disabled with little to no income.

Disability insurance is meant to provide a temporary or long-term income replacement for individuals who can’t work as a result of a covered illness or disease. Though the process looks a bit different depending on the policy and the disability, here’s what you can expect:

1. First, you receive disability insurance coverage either through work or by buying your own policy.
2. If you can’t work due to an illness or injury, you can file a claim with your insurance company and provide medical records. The company then determines if you are eligible to receive payments under the policy’s provisions. Some policies will cover you if you can’t do your current job, while others will only cover you if you can’t do any job.
3. You’ll have an elimination period, which is a waiting period before you’re eligible to start receiving benefits.
4. Depending on the type of policy you have, your benefits may cover you for anywhere from just a few months to retirement age.

If you’re unable to work as a result of an injury or illness, you have a few options. The first step is to check with your employer to see if they provide disability insurance coverage. Though your employer doesn’t have to hold your job for you while you’re out, you might still get the benefits.

If you didn’t have coverage through an employer, or were unemployed when you became disabled, you can check with the Social Security Administration. The Social Security Disability Insurance (SSDI) program provides coverage to anyone who’s met the work and tax requirements. SSDI is an any-occupation insurance program, meaning you must be fully unable to work to qualify for benefits.