Buying insurance to protect your home, car, and health is a no-brainer. But what about getting coverage that protects your ability to earn an income? After all, that's what allows you to pay for all of the above and so much more.
To protect yourself against the risk of losing your paycheck due to injury or illness, there's disability insurance. In this definitive buyer's guide, we cover everything you need to know about the purpose and importance of disability insurance, including key elements of coverage, answers to FAQs, and more.
Let's get started.
Disability insurance definition
Defining disability insurance is simple — it's protection for your income.
But understanding the ins and outs of all the various types of policies and how they work gets complicated fast.
So, let's start with the basics.
Disability insurance is a type of coverage that will replace a portion of your income if a disabling injury or illness prevents you from working in a covered occupation. Think of it as protection for your greatest asset — your ability to work and earn a living.
Having this form of coverage provides financial security for you and any loved ones who may depend on your ability to earn a paycheck. The benefits you receive from your policy can be used however you want, from monthly bills and out-of-pocket medical expenses to childcare and groceries.
You may also hear it referred to as disability income insurance, income protection insurance, or DI.
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How does disability insurance work?
Disability insurance is an agreement made between insurance companies and policyholders. In exchange for the monthly payments you make, the insurance company agrees to pay you a monthly benefit amount if you suffer a disability that affects your ability to work.
This coverage is designed to replace a percentage of the income you lose due to your inability to earn a paycheck. Having it means being able to meet your financial obligations — paying bills, covering household expenses, and providing for your family — while you’re unable to work.
Every DI policy will spell out the key benefits and features of coverage it provides, answering the following questions:
- How much will you, the policyholder, pay in premium? Just like any other type of insurance, this is the payment you must make each month to keep your coverage in force. If you don't pay your premiums on time and in full, your policy will lapse and you will lose your income protection.
- What is your policy's definition of disability? Some policies will pay out a monthly benefit if an injury prevents you from working at your normal job, but allows you to do other types of work that will nonetheless reduce your income. Other policies will not pay benefits if you are able to work in another type of profession, even if you earn less money.
- How much will receive you receive benefits if you become disabled? In most cases, your benefit amount will be a percentage of your income. Individual policies typically pay up to 60% of the monthly income you earned before becoming disabled. Why not the full 100%? Because you pay your insurance premiums with your take-home pay that has already been taxed.
- How long will your benefit payments last if you become disabled? The benefit period may be a certain number of months or years, or up to a certain age. Short-term disability policies typically have benefit period options including 6 months and 1 year, whereas long-term disability policies include benefits periods of 2, 5, or 10 years, or up to age 65.
With these key elements of DI in mind, let’s take a closer look at what types of conditions are typically covered by disability insurance.
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What does disability insurance cover?
Disability insurance covers injuries and illnesses that limit your ability to do what’s expected of you at work. Seems pretty straightforward, right? Well, there are still many misconceptions about what is considered a disability and what isn’t.
For example, what comes to mind when you hear the word "disability"? Often times it's freak accidents and rare birth defects. All of those unlikely, tragic events that we believe just can't happen to us.
But this simply isn’t the reality.
More than 25 percent of today's 20-year-olds will experience a disabling event that prevents them from working for at least three months before retirement. And when you consider the most common causes of long-term disabilities, it’s really not all surprising. Take a look for yourself here:
- Back pain
- Heart disease
You read that right. 90% of claims filed for long-term disability benefits stem from medical illnesses, not physical injuries.
To be clear, this doesn’t mean injuries such as fractures, sprains, and strains of muscles and ligaments are not disabling. What it does mean though is that the scope of disabilities that can prevent you from earning an income is a lot broader than most people realize.
How to get disability insurance coverage
When shopping for disability income insurance, any coverage you receive will ultimately come from an insurance carrier. But there are several different sources you can use to obtain coverage.
One option is to shop for a policy as an individual. Disability insurance for individuals can be obtained by working with a licensed independent insurance agent or going directly to an insurance company. When you buy an individual policy, you own it for as long as you pay the premium. Plus, the amount you pay is generally locked in. It will not change unless you opt for more coverage. Individual plans are also portable. You don’t lose coverage by changing jobs or losing your employment.
Another option is to get covered through work. Often, group disability insurance coverage can only be obtained if it is offered to you by your employer or an association you belong to. Because many employers offer group coverage as an employee benefit, they may pay some or all of the premium cost. Group disability plans are guaranteed issue. This means if you apply for coverage, you are automatically enrolled. There is no underwriting.
The biggest downside of an employer-sponsored policy is that it’s possible to lose coverage. This can happen in two ways.
- First, you will lose your coverage if you no longer work for the employer sponsoring the group plan. This type of coverage is contingent on your employment.
- Second, companies conduct annual renewals of their benefits, including group DI. Upon these reviews, there is no guarantee the plan will be renewed. Employers can simply decide to cancel the plan at any time.
While enrolling in a group disability plan through work is easier and cheaper, individual coverage is stronger and more reliable. That’s why purchasing an individual plan is typically the recommended route, even if you already have group coverage.
Looking for individual coverage? You're in the right place.
What to expect during the DI underwriting process
Your risk of becoming disabled plays a large role in determining how much you will pay for coverage. So how exactly do insurance companies calculate your risk of becoming disabled?
Individual disability income insurance requires underwriting. Whereas group plans help insurers spread their risk among a large group of policyholders, issuing an individual policy requires the insurance companies to assess the risk of a single applicant.
Before you get caught up in the cost, it helps to understand the various factors that insurance companies look at when assessing risk.
1. Your age
The older you get, the more likely you are to become disabled. So naturally, the cost of DI coverage increases as you age. That’s why buying disability insurance is a smart investment for healthy young professionals. Getting covered in your 20s or 30s allows you to lock in a lower rate and, in many cases, actually save money in the long run compared to if you would've waited and bought a policy at a much higher rate later in life.
2. Your gender
All other factors being equal, studies show that women can pay up to 40 percent higher premiums for disability insurance. While this may same unfair, the reason for this is that, historically, women tend to file more claims than men and for longer time periods. For what it’s worth, the exact opposite is true for life insurance; men pay higher rates than women do with all other factors equal.
3. Your health history
While there are some exceptions, most insurance companies offering DI products will use your health past and present to foreshadow your risk of disability in the future. That's why insurers will take into consideration:
- Past or current tobacco use
- Chronic conditions
- Family medical history
- Your current height and weight
- Results from blood and urine tests
Once again, the younger and healthier you are, the better off you will be when buying.
4. Your job occupation
One thing that makes disability coverage unique is that insurers consider your job when assessing your risk of disability. This is done for two reasons.
First, some jobs are more susceptible to injury or illness than others. Police officers, firefighters, construction workers, and manufacturing workers are more likely to get injured on the job than, say, your typical office worker.
Second, insurers also assess how specialized a job is. The more difficult it is to perform a job with certain injuries or illnesses, the more the insurance company may have to pay in benefits. For example, an office worker who becomes confined to a wheelchair may return to their regular job at some point. The same can’t be said for a surgeon or a mechanic, which are both highly specialized in their own right.
Insurance companies classify jobs based on the hazards of the work you do and the difficulty in returning to work after a disability. These occupation classes are based on a job's duties, not on the job title. If an individual has multiple or part-time occupations, the occupation classification will be determined by the occupation with the greatest risk.
5. Your annual income
Disability insurance benefits are based on a percentage of your income. The more you earn, the more benefits you will be able to collect if you become disabled. As a result, high-income earners present a greater financial risk to the insurance company.
6. Your location
Where you live can also impact your risk of disability. Insurance companies consider the regulations, claims history, and living costs in your state of residence.
Learn More: How Much Does Disability Insurance Cost?
Types of disability insurance to know
So far, we’ve discussed what disability insurance is, how it works, and where you can get it. But what are the different types of disability coverage that are actually available to you as a consumer?
While there are various types of policies and sources of coverage out there that exist, let's narrow our discussion down to the four most important you should know.
1. Long-term disability insurance
Long-term disability coverage protects the income of people affected by disabilities for an extended period. It covers serious injuries and illnesses that limit or prevent a person from working for several months or years — even permanently.
Benefits end once you’ve recovered from a disability up to a maximum benefit period. This period can be a set number of years, such as 10 years. You can also purchase policies that will pay up to age 65.
You can purchase long-term disability insurance through a group plan or by getting your own individual policy. It is more expensive than short-term disability, but it offers much better protection.
Long-term disability policies typically replace between 60 to 80 percent of your income. Many policies even replace the income that is lost if you have to take a lower-paying job due to an injury or illness.
Apply online for long-term disability insurance in minutes.
2. Short-term disability insurance
On the other hand, short-term disability plans pay out benefits for those who experience temporary injuries and ailments. It is typically provided through an employer group plan.
Although you can purchase an individual short-term disability insurance policy through some companies, this shouldn't be done in place of getting long-term coverage. That’s because the cost of the premiums may not justify the amount you would receive in benefits. Many people use individual short-term coverage to supplement gaps they have in their long-term coverage and maximize their income protection.
Short-term disability insurance will typically replace between 40 to 60 percent of your pre-disability income. Benefits generally last three to six months. Some policies may pay as long as two years. Benefits typically begin 14 days from when disability occurs.
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3. Social Security Disability Insurance (SSDI)
SSDI is a government program administered by the Social Security Administration. Like the other types of coverage discussed above, SSDI pays benefits in the event a disability prevents you from working.
However, SSDI benefits are the most difficult to qualify for. Qualifications include:
- You must have worked in jobs covered by Social Security.
- You must have worked long enough and recently enough under Social Security.
- You must have a medical condition that meets Social Security’s definition of disability.
- You must be unable to work for a year or more because of a disability.
- You must have a condition that significantly limits your ability to do basic activities, such as lifting, standing, walking, sitting, and remembering.
You generally will not be considered disabled if you work and earn more than $1,220 per month. If you are not working, Social Security will consider whether you can work. If you can, even if it’s not the type of job you did before your injury or illness, you will not qualify for SSDI benefits. Social Security will base this decision on your medical condition, age, education, past work experience, and transferable skills.
According to the Social Security Administration, only 34 percent of SSDI claimants had their applications approved from 2006 to 2015. Even if you do qualify for SSDI, benefits will likely replace only a small fraction of your income. The average monthly disability benefit in 2019 is $1,234.
Learn More: Social Security Disability Insurance
4. State disability insurance
You may also be covered by a state-sponsored program if you live and work in one of these five states:
- New Jersey
- New York
- Rhode Island
These five states legally require employers to offer disability coverage to employees for injuries and illnesses that occur outside of the workplace.
Like SSDI, state disability insurance has a number of shortcomings that make it an unreliable coverage option.
Learn More: State Disability Insurance
Setting the record straight on workers' comp
Technically, workers' compensation is not a type of disability insurance; it’s accident insurance that is paid for by employers. But because it’s so commonly confused with disability insurance, we make sure to set the straight record straight any time we can.
Under workers’ compensation insurance, you may receive benefits to cover medical bills or rehabilitation costs if you become injured or ill on the job. Workers' comp covers partially lost wages if you miss work. Some policies will provide death benefits if you’re killed on the job.
Unlike the other types of coverage we've discussed so far, workers' comp only applies if you become sick or hurt while performing the duties of your job. According to the Bureau of Labor Statistics, only 1 percent of American workers missed work due to an occupational injury or illness this past year. That being said, you shouldn't rely solely on workers' comp to protect your income.
Learn More: Workers' Comp vs. Disability Insurance
So, who needs disability insurance anyway?
Wondering if you should put a plan in place, but not sure if you actually need it?
Well, if you rely on your source of income, there's a good chance you should at least consider adding a disability plan to your financial plan — especially if you have loved ones who depend on you.
Disability income insurance is a smart investment for young, healthy individuals who want to secure their financial future. Without adequate coverage, a bad accident, loss of vision, chronic condition, or illness could cause financial hardship. Even a temporary disability can cause you to deplete your savings, fall behind on bills, and rack up debt.
Just consider what would happen if you suffered a heart attack or were injured in a car accident. Because it didn’t happen as a result of your job, you wouldn’t be able to collect workers’ compensation. You wouldn't know for sure if you can qualify for government disability benefits either. That means without DI, you would have no active source of income while you recover.
Disability insurance is for the mechanic with a broken hand who can’t repair cars for a few months. It can provide income to pilots and truck drivers who suffer from vision problems. It helps architects, accountants, and attorneys who can’t work after suffering from traumatic brain injuries. It provides financial security for small business owners and other self-employed professionals who do not have the luxury of a cushy employee benefits package from corporate.
Disability insurance is for everyday people like you and me.
Is it worth it to get disability insurance?
You've decided it's time. You need to purchase disability insurance.
But the cost still feels hard to justify for some. After all, you're about to buy something you hope you will never, ever have to use. So, Is it really worth it?
If you find yourself in this situation, the easiest way to understand the value of disability insurance is to consider what you would do if you couldn’t work for an extended period of time.
- What if you endure a temporary or permanent disability at some point in your working life? (One in four will.)
- How long could you go without a paycheck before experiencing financial hardship? (70% of Americans couldn’t last one month.)
- Does your group plan provide enough coverage to maintain your current lifestyle?
- Could you get by on government disability benefits? If you’re actually approved, that is.
Of course, there’s no way to answer any of these questions for certain. But you can prepare for the worst by putting a plan in place today.
When you buy disability insurance, what you're really buying is peace of mind for your and your family's future. Because it's always better to be proactive now than reactive when it's too late.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.