What is Disability Insurance? 5 Things to Consider Before You Buy

Wondering if you need disability insurance? Here’s what you need to know about this coverage.
Updated April 11, 2024
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Disability insurance is a form of income protection that pays a monthly benefit to people who become disabled and are no longer able to work. Some employers offer short-term and long-term disability coverage, and Social Security also offers disability insurance. You can also purchase disability plans directly from insurance companies.

According to the Social Security Administration (SSA), 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. This means planning for a potential disability is critical for those earning an income.

Disability insurance could help you if you are temporarily or permanently disabled. Here’s what you need to know about this type of coverage so you can make an informed decision about purchasing it for yourself or opting into a plan offered by your employer.

In this article

What is disability insurance?

Disability insurance is designed to provide you with a stream of income in the event you are unable to work. You pay insurance premiums each month to an insurance provider — as you would with any other insurance policy — and if you’re unable to work due to a medical condition or injury, you can file a claim and potentially receive a portion of your income in return, typically for a set length of time. 

Mental health conditions are typically covered under disability insurance policies, but check your policy to confirm. 

Your benefit amount 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 the terms of your insurance policy.

If you're buying an individual policy, it will go through underwriting, which means you will need to answer health and lifestyle questions on the application. The insurance company will review your answers and may request your medical records. Based on that information, the company will decide whether to issue you a policy.

If your disability insurance is part of your employee benefits, you typically don't need to go through underwriting.

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How disability insurance works 

You probably won’t have immediate access to your insurance payout. Disability insurance policies typically include what’s known as an elimination period. This is a waiting period between the time you become unable to work and when you start receiving benefits.

For example, if your policy has an elimination period of one month, you have to be unable to work for one month for the insurer to begin paying benefits. 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 only pays benefits if you’re unable to work in any occupation, it will likely be harder to get benefits, especially on a long-term basis.

Some policies may pay partial disability benefits if you return to work part time. 

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.

How disability benefits are taxed

How benefits are taxed depends on whether you purchase the plan on your own or through an employer. If your disability insurance is through an employer and your employer helps to pay for it, you may need to pay taxes on the part of the benefits that are due to your employer's payments.

If you purchased the policy yourself, you may not need to pay taxes on the benefits. If you receive Social Security Disability, you may need to pay taxes depending on your overall income. A tax professional can help you determine whether you need to pay taxes on your disability benefits. 

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 if you meet the requirements of your policy. This might keep you from needing to deplete your emergency fund or liquidate your retirement savings to help cover your living costs while you're on medical leave.

Before you purchase disability insurance, it’s important to review the coverage you might already have. Some employers provide disability insurance. Consider checking with them about your eligibility, the type of coverage offered, and the process for filing a disability claim.

Additionally, depending on the job, your employer might be paying into a state workers’ compensation insurance fund. In this case, if you experience a work-related injury, you might be entitled to these benefits. However, workers’ compensation generally won’t cover you if you become disabled outside your work.

Even if your employer offers disability coverage, you might feel more comfortable getting a supplemental policy on your own. Your employer’s coverage might not meet your needs, or it could have some gaps that you want to fill. When choosing disability income insurance, 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 could cover your costs if you become unable to work.

The 4 types of disability insurance

There are four types of disability insurance plans to be aware of.

Short-term disability insurance Long-term disability insurance Temporary disability insurance Social Security disability insurance
How long benefits can be used 3-6 months 2, 5, 10 years, sometimes until age 65 Up to 6 months (varies by state) For as long as your medical condition hasn’t improved and you can’t work
Typical waiting period 7-30 days 90 days Varies by state At least 5 full months unless your disability is from ALS
Where to obtain coverage Employer or directly from insurance company Employer or directly from insurance company Offered by California, Hawaii, New Jersey, New York, and Rhode Island Social Security Administration

1. Short-term disability insurance

In general, short-term disability insurance is offered by private insurance companies and is aimed at those who can’t work for between three and six months. You may be able to purchase a plan through your employer or purchase a plan directly from an insurance company.

If your disability keeps you from working, but you’re expected to be back to work at some point in the relatively near future, short-term disability benefits could 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 14 days to one month, and benefit payments are usually up to two years.

According to the Council for Disability Awareness, the most common reason for a short-term disability claim is pregnancy.

2. Long-term disability insurance

A long-term disability benefits policy is designed to cover you if you become unable to work for more than six months. These plans are offered by private insurance companies and may be purchased directly or offered by your employer. The elimination period is typically several weeks to several months. Some long-term disability insurance products include riders, or add-ons, that increase the benefits with the cost of living. 

Check with your insurance company to see how long you could receive benefits. With long-term disability, there’s usually a limit on how long the benefits last, and it could be anywhere from a few years to age 65 or later.

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 completely replace your income. 

Check with your state to see what type of temporary disability coverage, if any, 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

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 go toward Social Security benefits like this.

Qualifying for SSDI benefits can be difficult, but if you have a permanent disability, this might be an option for you. This is because Social Security has a strict definition of disability. You must have a condition that significantly limits your ability to do work-related activities for at least 12 months.

The Social Security Administration maintains a list of medical conditions that are severe enough to keep a person from working, but these aren’t the only conditions that Social Security will consider for disability benefits. 

How much does disability insurance cost?

In general, 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, your individual situation will be considered, and a quote will be based on factors such as:

  • Age
  • Gender
  • 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

In general, 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 likely come with lower premiums. A policy that covers you if you become disabled and unable to work in your present occupation is likely to cost more than one that covers you if you’re unable to work in any occupation.

Additionally, if you choose a benefit that’s a lower percentage of your income, a policy that doesn’t pay out benefits as long, or a longer elimination period, 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. But it might be worth paying more for the peace of mind that more benefits bring. 

5 factors to consider when you purchase disability insurance

  • How much disability insurance coverage you’ll need: 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.

Breeze Benefits

  • Plans start at just $9 per month
  • No medical exam required
  • Get a quote in seconds and coverage in under 15 minutes
  • Excellent customer service

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 purchase a policy.

What is the best disability insurance?

The best disability insurance option 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 a disability insurance policy 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 care services. These are common policy exclusions. Additionally, you may not 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, such as 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 help 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 that you couldn’t pay the bills if you become unable to work for a period of time, it might make sense to purchase a disability insurance policy. You might opt for it through your employer or purchase an individual disability insurance policy if it's not offered through your employer. Although you might feel that your emergency fund offers 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 disability plan, check to see what other coverage you have to help determine the type of insurance coverage you need. Carefully research disability insurance policies before making a decision so you’re more likely to choose the right coverage for your budget and situation.

Breeze Benefits

  • Plans start at just $9 per month
  • No medical exam required
  • Get a quote in seconds and coverage in under 15 minutes
  • Excellent customer service

Author Details

Miranda Marquit Miranda Marquit has covered personal finance for more than a decade and is a nationally-recognized financial expert and journalist, appearing on CNBC, NPR, Forbes, Yahoo! Finance, FOX Business, and numerous other outlets.

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