Disability insurance (DI) ensures you continue to receive an income if a serious illness or injury leaves you unable to perform your job. There are various types of policies available, including group coverage offered through some employers, or coverage you buy on your own from an insurance company or agent. In either case, DI typically pays you anywhere from 60% to 80% of your income for a set period of time.
Imagine you were injured in a car accident and couldn’t work for a month, a year, or several years. What would the loss of income mean to you and your family? At best (say, if you have a working spouse), you’ll probably need to cut back on your spending and make some adjustments to your lifestyle. For the longer term, you might have trouble saving for things like retirement or your children’s education.
Ok, so maybe you’re thinking, “that couldn’t happen to me.” Think again. According to the U.S. Social Security Administration (SSA), one in four 20-year-olds will have a disability that impacts their ability to work at some point before they retire. These disabilities result not only from traumatic events and accidents, but from ailments such as cancer, arthritis, heart disease, and mental health issues such as depression.
DI is designed to protect you financially if you’re ever among those one in four.
How does disability insurance work?
DI is a form of insurance that pays you a percentage of your income — 60% to 80%, depending on the type of coverage — if an illness or injury prevents you from working. This is money you can use to maintain your lifestyle and financial goals with perhaps only minor adjustments.
DI should not be confused with workers’ compensation insurance, which applies only to injuries and ailments obtained while working. DI applies to injuries and ailments that happen outside of the workplace as well.
What does disability insurance cover?
Your DI policy contract will spell out exactly what injuries and illnesses will be covered. While these may vary by policy, the most common causes of long term disabilities include the following:
- Back pain
- Heart disease
According to the Council for Disability Awareness, the most common LTD claims are for musculoskeletal disorders, cancer, pregnancy, and mental health issues.
The parts of a disability insurance policy
As with just about any other form of insurance, a DI policy is a contract between you and an insurance company. For DI, that contract that spells out several things:
- The policy’s definition of disability — Some insurance companies will only pay if your disability prevents you from doing any kind of work whatsoever, even at a lower income. This is called an any-occupation policy. Others will allow you to do other kinds of work. This is known as an own-occupation policy.
- How much the policy will pay (your benefits) — This is usually a percentage of your income — 60% to 80%, depending on the type of policy.
- The benefit period — The policy will pay for a certain period of time. Some policies provide benefits for just a few months, while others measure the term in years, or even until your retirement age.
- The elimination period — Every DI policy has an elimination period, which is a length of time that must elapse between the day you become disabled and the day you start to receive your payments. For STDI, the elimination period is usually less than 14 days. Most LTD policies feature an elimination period of 90 days.
- The premium — This is the amount of money paid to the insurance company — either by your employer for group insurance, or by you for an individual policy — to keep the coverage in force. As with any other kind of insurance, if the premium is not paid, you risk cancellation of the policy.
Types of disability insurance
There are two main categories of private DI.
- Group coverage. Your employer might pay for group DI and provide it to you as a perk of the job. These typically are what’s known as short term disability insurance (STDI) policies, which pay you for just a few months if you’re unable to work.
- Coverage you purchase as an individual. You can buy DI either directly from an insurance company, or through an agent. These are what’s known as long term disability (LTD) insurance policies. As the label implies, they provide income for multiple years, or even until you would retire.
A third source of DI is the SSA. Known as Social Security Disability Insurance (SSDI), the program is very difficult to qualify for and more limited in coverage than group or individual policies.
For the purposes of this article, we’ll focus mainly on group and individual DI.
Purchasing disability insurance
Whether you’re offered group coverage from your employer, or want to purchase a policy individually, you can expect the insurance company to ask about your family’s medical history, your pre-existing health conditions, what medications you take, and whether or not you use tobacco. You may be asked to take a short medical exam, in which information such as your height, weight, and blood pressure will be recorded. You’ll also provide blood and urine samples.
Once you’re approved for coverage, you should receive a packet of information when the policy goes into effect. This explains the policy in some detail, along with how to pay your premium (if applicable), and how to file a claim. Put this information in a safe place, preferably wherever you keep your information for your car, home, life, health, and other policies. And remember to make your premium payments on time.
What to expect when you file a disability insurance claim
If you need to file a claim, refer to your policy packet, the insurance company’s website, or your agent (if applicable) for instructions on what to do. If you have group insurance, your company’s human resources department ought to be able to help as well.
Typically, you’ll be required to submit to the insurance company a claim application. This will include forms you need to fill out, along with statements from both you and your employer that detail your injury or illness, and how it affects your ability to do your job. The application will also require a physician’s statement, which will provide even more detail as to the extent of your condition.
If your claim is approved, you’ll need to wait until the end of your policy’s elimination period to start receiving your payments. You’ll receive a payment monthly, per the terms of your policy. You’ll stop receiving payments when one of two things happens: either you recover from your injury or illness enough to return to work, or your benefit period ends.
Note that if your disability happens on the job, your DI payment may be reduced by the amount of any workers’ compensation benefits you receive. In other words, the insurance company will prevent “double dipping.”
Your claim could also be denied. This can happen if, for instance, you don’t meet your policy’s definition of disability (more about that below). It can also happen if the insurance company determines you misrepresented something on your claim application. Or, it can happen if your claimed disability is a pre-existing condition — something you were dealing with prior to the policy going into effect.
What disability insurance costs
The cost of DI will vary based on your type of policy and your salary. As mentioned above, group DI is often purchased by an employer and provided to employees at no cost, as a perk of employment. Employers vary, however, and it’s not uncommon for some to require employees to pay up to 3% of their salary for the coverage.
For LTD that you buy as an individual, you can expect to pay 1% to 3% of your salary. So if you earn $30,000 per year, your premium could be as much as $900 annually (or $75 per month). Earn $100,000 per year, and your premium could be as much as $3,000 annually ($250 per month).
Several factors will affect the premium. These include:
- How you earn a living — Jobs requiring heavy labor and/or specialized manual skills tend to drive the premium higher than jobs with just light labor involved.
- Your age — Because you’re more likely to become disabled as you age, older workers can expect to pay more than younger workers.
- Your gender — When all other factors are equal, women tend to pay more than men for DI. Historical data show that women suffer more career-impacting disabilities than men. They also have longer-lasting claims periods than men.
- Your health history — Remember how the insurance company collects information about your health history? This will be used to help set your premium. Generally, the healthier you are, the less likely you are to become disabled, and thus be more likely to pay less in premium.
- Your state — Certain states and geographic regions have higher rates of disability than others. If you live in one of these areas, you can expect to pay more in premium.
- Your policy choices — The amount of benefit, length of your benefit period, and length of your elimination period will all impact what you pay.
If you’re shopping for disability insurance on your own, you owe it to yourself to check with several insurers to get the best premium. An agent may also be able to help you find a policy that provides the coverage you need at a cost you can afford.
One more thing to note: Unlike health insurance premiums, your DI premium payments are, unfortunately, not tax deductible. Be sure to discuss the implications of your insurance premiums with your tax preparer.
Social Security Disability Insurance
Most of the focus of this article has been on employer-provided STDI and individually-purchased LTD policies. But there is another source of DI: the U.S. Social Security Administration (SSA). Its program, Social Security Disability Insurance (SSDI), is intended as a “safety net” for those unable to work.
To qualify for SSDI, you’ll need to have worked a specified number of years (the number varies by your age when you become disabled) in a job where you pay Social Security (FICA) tases. You’ll also need to have an impairment that meets the SSA’s definition of disability. If you’re approved for benefits, you’ll have to wait for five months to start receiving payments. You can continue to receive those payments until you’re able to work again. However, the program will review your condition every one to three years to determine if it has improved.
With all this in mind, SSDI is notoriously difficult to apply and qualify for, and the benefits are usually more limited than those available with an LTD policy. According to Allsup, a company that helps disability claimants get their benefits, only 39% of SSDI initial applicants were awarded benefits in 2020. The program also has a massive backlog of cases. Applicants can wait for up to six months to have an initial claim reviewed. It can take 500 days or longer to appeal a rejection!
Is disability insurance worth getting?
One in four workers will become disabled at some point before they retire. The financial implications of being unable to work for a period of time — and the potential need for DI — may be much different for you than for someone else.
If, for instance, you’re the sole breadwinner of a family of four, and you don’t have much money saved for emergencies, then purchasing an LTD policy is probably something you consider. On the other hand, if your spouse works, and/or you have several months’ worth of salary saved in a way that could supplement the benefit payout from an employer-provided STDI policy, then you might be able to get by without investing in an LTD policy.
It’s a good idea to think of DI in terms of your larger financial planning picture — one that includes your savings and investments, along with life insurance. Your financial advisor can help you understand your needs and options.
Disability insurance helps us live free of worry
Insurance gives us confidence to live our lives free of worrying about what would happen if we have a severe and unexpected financial hardship. And while it’s unlikely you expect to be unable to work due to a disability, it can happen. Disability insurance is designed for that scenario, ensuring you continue to receive an income until you can return to your job.