At some point, there’s a chance you develop a disability and be unable to work. According to the Social Security Administration, those born in 1999 have at least a one-in-four chance of becoming disabled at some point during their working life before reaching normal retirement age.
Even if you have a disability and are unable to work for a relatively short period of time, that missed income can have a big impact on you down the road. Now, consider what might happen if you had a longer recovery period and couldn’t work for a year or more? How would that impact your long-term financial goals?
Disability insurance can help you get through those times with some income and is one of the insurance coverages you might need. Here’s what you need to know about this type of coverage.
What is disability insurance?
Disability insurance is designed to provide you a stream of income in the event you are unable to work. You pay a premium each month — as you would with any other insurance policy — and if you’re unable to work for a period of time due to illness or injury, you can file a claim and receive a portion of your income in return.
Your insurance payout depends on how much you’re making, and what percentage of your income the policy pays out. For example, you might receive a payout of 80% of your income for six months, depending on your insurance policy and the reason you can’t work.
Realize, too, that you probably won’t have immediate access to your insurance payout. In general, disability insurance policies include what’s known as an elimination period. This is the period between the time you become unable to work and when you start receiving benefits.
For example, if your elimination period is one month, you have to be unable to work for that month, and then the insurer will begin paying benefits after this waiting period. However, if you begin working again after three weeks and don’t meet the elimination period requirement, you won’t receive benefits.
Finally, some policies make a distinction between being able to continue working in your current occupation, and whether you can work at all. For example, you might end up with a disability that prevents you from going back to work in your current career (own occupation), but you might still be able to work another job. If you have a policy that specifies any occupation, it will likely be harder to get benefits, especially on a long-term basis.
Carefully read your disability insurance policy so you understand the benefits, elimination period, and other terms, such as how long the benefits last and what you can expect in terms of what qualifies as a disability.
Who should purchase disability insurance?
If you’re concerned about your income if you become unable to work, it might make sense to purchase disability insurance.
What if you become ill and have to spend weeks in the hospital, and then spend more time recovering afterward? With disability insurance, you could begin receiving benefits in the amount of a certain percentage of your income in order to keep a revenue stream coming in. This might keep you from needing to deplete your emergency fund or liquidate your retirement account to help cover your living costs during a time without income.
Before you purchase disability insurance, it’s important to review the coverage you might already have. Some employers actually provide some degree of disability insurance that you can access. Additionally, depending on the job, your employer might be paying into the state workers’ compensation insurance fund. In this case, if you’re injured or become sick because of the job you do, you might be entitled to these benefits. However, workers’ compensation won’t cover you if you become disabled outside your work, so disability insurance can still be a good backstop.
Indeed, even if your employer offers disability coverage, you might feel more comfortable getting a supplemental policy. Your employer’s coverage might not meet your needs, or it could have some gaps that you want to fill. When choosing a disability policy, consider the coverage you already have from other sources and then choose what works best for your situation.
However, you might not need to purchase disability insurance if you’ve built up enough of an emergency fund to self-insure against short-term illness and injury, or if you have passive income streams that can cover your costs if you become unable to work.
The 4 types of disability insurance
The question, “What is disability insurance?” comes with a few different answers. Understanding what you might be entitled to is important as you consider different policies and decide what works best for your situation. Here are four types of disability insurance plans to be aware of.
1. Short-term disability insurance
In general, short-term disability insurance is aimed at those who can’t work for between three and six months. If your disability keeps you from working, but you’re expected to be back to work at some point in the relatively near future, your short-term disability benefits will replace a portion of your income while you can’t work.
Depending on the policy, and how you were injured or became sick, this type of insurance might kick in after workers’ compensation or some other type of coverage. The elimination period for policyholders is usually up to 14 days to a month, and benefits usually only last up to two years.
2. Long-term disability insurance
On the other hand, a long-term policy is designed to cover you if you become unable to work for more than six months. Once again, though, the expectation is that you’ll eventually go back to work, even if it’s after a period of a year or two of recovery. The elimination period is typically several weeks to several months.
Check with your insurance company to see how long you’ll receive benefits. With long-term disability, there’s usually a limit on how long the benefits last. You might not be able to receive payouts indefinitely, even though there are long-term disability policies that pay monthly benefits for the rest of your life.
3. Temporary disability insurance
Some states offer temporary disability insurance designed to cover situations in which you’re unable to work in the short term. However, it’s important to note that these benefits aren’t widely available, and they won’t replace your income. Check with your state to see what type of temporary disability coverage is provided in the event that you’re injured or ill outside of work and can’t perform your duties for a short time period.
4. Social Security disability insurance
Finally, if you become permanently disabled, you might be able to qualify for Social Security Disability Insurance (SSDI). Part of the FICA taxes you and your employer pay are designed to provide these benefits.
However, qualifying for Social Security disability benefits can be very difficult, and maintaining your benefits also comes with restrictions. But if you can’t work for a long time period, or if you have a permanent disability and your private disability insurance won’t continue providing benefits, this might be an option for you.
How much does disability insurance cost?
If you get disability insurance through your employer, you might pay between 1% and 3% of your annual income in annual premiums. For someone making $50,000 per year, that could amount to between $500 and $1,500 per year. However, some policies start at $25 per month or less.
The cost of disability insurance varies based on a variety of factors. As with any insurance policy, including car insurance, life insurance, and homeowners insurance, your situation will be considered, and a quote will be based on things such as:
- General health
- Your occupation (and whether it’s considered more dangerous)
- Habits (like smoking)
- How much of your income is paid out in benefits
- The limit on your benefits
- Whether the policy is short-term or long-term
- Whether the policy covers your own occupation or any occupation
For the most part, if you’re relatively young and healthy, and work in a job in which you’re less likely to be injured or get sick, your disability insurance policy will probably come with lower premiums. A policy that covers disability in your own occupation is likely to cost more because the definition of disability is less strict. Additionally, if you choose to pay out a lower percentage of your income, or a policy with a lower limit on benefits, you could see a smaller premium.
As a rule of thumb, the harder it is to qualify for benefits, or the less a policy pays out in benefits, the less expensive the policy will be. However, if you’re concerned about access to benefits, it can make sense to pay a little more for a policy.
5 factors to consider when you purchase disability insurance
- How much disability insurance coverage you’ll need: Determine how much you might need with your insurance. What percentage of your income will cover your living expenses? What limits do you think are enough to ensure you can cover your costs if you become disabled.
- Elimination period: How long do you want to wait before the insurance kicks in? Does it make sense to have a shorter period, such as one month, or do you think that an extended period, like three months, makes sense?
- Maximum benefit period: Find out how long the disability insurance benefits last. Most policies end after a set period of time. The longer the benefit period, the higher the premium is likely to be.
- Policy renewability: A noncancelable policy is one that renews every year without an increase in premiums. On the other hand, a guaranteed renewal policy lets you keep renewing, but you could see an increase in premiums.
- Definition of disability: Will the policy cover you if you can’t work in your own career, or do you have to be considered unable to work in any job before the benefits kick in? Also, find out how the policy defines long-term and short-term disability.
FAQs about disability insurance
Is short-term disability insurance worth it?
Depending on your situation, short-term disability insurance might not be worth the cost. If you have a large enough emergency fund to cover costs, you might be able to self-insure. However, if you aren’t sure you can cover your costs if you’re unable to work for a short period of time, or if you don’t want to deplete your savings, it might be worth it to pay for a policy.
What is the best disability insurance?
The best disability insurance varies from person to person. Consider what coverage you already have from other sources, as well as your financial situation. Look at the possibilities and choose disability insurance that meets your budget and needs.
What is not covered by disability insurance?
For the most part, you won’t receive coverage for medical or long-term services. Additionally, you probably won’t get benefits when you’re over the age of 65. In general, disability insurance is designed as an income replacement. You need other types of insurance to cover other costs, like health insurance for medical expenses.
How long do you need disability insurance?
How long you need disability insurance depends on your individual circumstances and needs. In general, though, it’s wise to consider purchasing long- or short-term coverage to protect you during your working years, or until you're able to save enough in an emergency fund to cover any unexpected costs.
How do you buy disability insurance?
In some cases, you might be able to buy disability insurance through your employer, and get a special rate based on your company’s benefits. You can also buy insurance through an insurance agent or broker. Another option is to check with your life insurance company to find out whether it offers disability insurance.
Does disability insurance cover COVID-19?
If you have an existing short-term disability insurance policy, you may be covered if you get sick with COVID-19 and you're unable to work. You'll likely need documentation from your doctor verifying that you're unable to work. Long-term disability coverage may also protect you if you're still struggling with complications from COVID-19 and can't work for a longer time period.
The bottom line on disability insurance
If you’re worried about how you’d pay the bills if you become unable to work for a period of time, it can make sense to purchase a disability insurance policy. Although you might feel that your emergency fund can offer a safety net, if you’d struggle financially if you’re unable to work for more than six months, a long-term disability policy might make sense.
Before buying a policy, review your needs and check to see what other coverage you have. Carefully research disability insurance policies before making a decision so you’re more likely to choose the right coverage for your budget and situation.