Disability Insurance: What Is It, How Does It Work & Is It Worth It?

It helps to think of disability insurance as financial protection for your most valuable asset — the ability to work and earn a living.

Homeowners insurance protects where you live. Car insurance protects what you drive. Health insurance protects your well-being.

But what protects your ability to earn an income? (After all, that's what allows you to pay for everything listed above...)

To protect yourself against the risk of losing your paycheck due to injury or illness, there's disability insurance. In this article, we cover everything you need to know about extremely important, yet often overlooked type of coverage.

Disability insurance definition

Disability insurance is a type of coverage that replaces a portion of your monthly income if injury or illness prevents you from working. It provides financial security for you and any loved ones who may depend on your most valuable asset — your ability to earn a paycheck. You may also hear disability insurance referred to as disability income insurance or income protection.

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How does disability insurance work?

Disability income 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.

Disability insurance is designed to replace a percentage of the income you lose due to your inability to earn a paycheck. Having disability insurance means being able to meet your financial obligations — paying bills, covering household expenses, providing for your family — while you’re unable to work.

A disability insurance policy will spell out:

  • How much you will 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.
  • How the policy defines 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 you will receive in benefits. In most cases, your benefit amount will be a percentage of your income. Policies typically pay 60 to 80 percent of what you earned before your disability.
  • How long your benefits will last. The benefit period may be a certain number of months or years, or up to a certain age.

With this in mind, let’s take a closer look at what types of conditions that disability insurance covers.

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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 its 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:

  • Arthritis
  • Back pain
  • Cancer
  • Depression
  • Diabetes
  • Heart disease
  • Stroke

Yes, you read that right. The Council for Disability Awareness reports that 90% of claims that are 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.

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How do I get disability insurance?

When shopping for disability income insurance, any coverage you receive will ultimately come from an insurance carrier. But there are several different avenues to coverage you may want to consider.

One option is to look for coverage 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 accept coverage as a part of a group. More often than not, 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 disability insurance 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.

  1. First, you will lose your disability insurance if you no longer work for the employer sponsoring the group plan. This type of coverage is contingent on your employment.
  2. Second, companies conduct annual renewals of their benefits, including group disability insurance. Upon these reviews, there is no guarantee the plan will be renewed. Employers can simply decide not to continue offering disability insurance.

While group coverage is easier to get (for those who have access), individual coverage is both stronger and more reliable. That’s why purchasing an individual plan is typically the recommended route, even if you already have group coverage.

Learn More: How to Get Disability Insurance

The disability insurance 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.

Your age

The older you get, the more likely you are to become disabled. Naturally, the cost of disability insurance increases as you age. That’s why buying disability insurance is a smart investment for healthy young professionals.

Your gender

All other factors being equal, women can pay up to 40 percent higher premiums for disability insurance. That’s because they file more claims than men and for longer time periods. (For what it’s worth, men get the short end of the stick when paying for life insurance.)

Your health history

Your health status today can foreshadow your risk of disability in the future. 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.

You job occupation

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 mechanic or plumber.

Insurance companies classify jobs based on the hazards of the work and the difficulty in returning to work. These occupation classes are based upon 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.

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.

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?

What are the different types of disability insurance?

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 income insurance coverage that are actually available to you?

Long term disability insurance

Long term disability income insurance protects the income of people who are affected by disabilities for an extended period of time. It covers serious injuries and illnesses that limit or prevent a person from working for several months or years — even permanently.

Important: Long term disability is different from long term care insurance, which helps cover the costs of care facilities if you are unable to perform several of the activities of daily living (bathing, dressing, eating, walking, using the bathroom).

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.

Learn More: Long Term Disability Insurance

Short term disability insurance

On the other hand, short term disability income insurance pays 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, many financial experts advise against it. That’s because the cost of the premiums may not justify the amount you would receive in benefits. If you can’t get short term coverage for free from your employer, you should establish an emergency fund.

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.

Learn More: Short Term Disability Insurance

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

State disability insurance

You may also be covered by state disability insurance if you live and work in one of these five states:

  • California
  • Hawaii
  • New Jersey
  • New York
  • Rhode Island

These five states legally require employers to offer disability insurance 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

Workers' compensation insurance

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 partial 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' Compensation Insurance

Who needs disability insurance?

If you rely on your source of income, you need disability insurance — 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 disability insurance, 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.

For example, consider what would happen if you suffer a heart attack. Because it didn’t happen as a result of your job, you wouldn’t be able to collect workers’ compensation. You wouldn't qualify for government disability benefits either. That means without disability insurance, you would have no active source of income while you recover. The same would be true if you were injured in an accident.

Disability insurance is for the mechanic who can’t repair cars for a few months with a broken hand. It can provide income to pilots and truck drivers who suffer vision problems. It helps architects, accountants, and attorneys who can’t work after suffering from traumatic brain injuries.

Disability insurance is for everyday people like you and me.

Is disability insurance worth it?

As you weigh your options, consider what you would do if you couldn’t work for an extended period.

  • 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 disability insurance plan in place today.

Better to be proactive now than reactive when it's too late.


Jack Wolstenholm is the head of content at Breeze.

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.

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