Disability Insurance [Guide]

Last updated on June 1, 2021 by Chris Granwehr in Retirement Planning

Disability insurance

Many full-time employers provide paid time off in the form of sick leave and vacation days.

But if you suffer from a serious illness or a significant injury, 5 or 10 paid days off won’t cover the full length of recovery.

What can you do if you aren’t healthy enough to work, but need cash to make ends meet?

Disability insurance is one option that can guarantee income during periods when you can’t work.

This page will detail everything you need to know about disability insurance, including what it is, how to get it, and how much disability insurance pays out in case of illness or injury.

What is Disability Insurance?

Disability insurance (sometimes called DI, disability income insurance, or income protection) is often talked about, but not everyone knows what it does or what it protects you from.

In the simplest terms, disability insurance is a type of insurance that pays you part of your regular income if you have an illness or an injury that prevents you from working.

Many Americans, at some point in their life, suffer from some sort of disability that leaves them unable to work.

Maybe you have back problems and are ready to undergo back surgery. Perhaps you shatter your ankle and need time to heal before getting back on your feet. Or maybe you’re suffering from a neurological disorder such as epilepsy or Parkinson’s disease. There are many medical conditions that make you eligible to collect disability insurance.

If you rely on the income from a 9-5 job, you will need to find a way to earn some money while you’re out of commission.

This is where disability insurance comes into play. As long as you qualify, having DI ensures that you will receive some amount of income while you are out of work. For DI policyholders, the protection offers incredible peace of mind.

How Much Does Disability Insurance Pay?

The most common question when it comes to disability insurance is “how much it pays when you can’t work?”

The amount varies because it’s usually a percentage of your income. For example, if you make $60,000 per year and your disability insurance covers 50% of your income, your benefit will be up to $30,000 in a calendar year.

When you are unable to work, bringing just a portion of your usual income can be a huge help. And while it might be a struggle to get by on half of your usual pay, there’s no question about it – half your salary is significantly better than bringing in no money at all.

Short-Term vs Long-Term Disability Insurance

There are two main types of disability insurance: short-term and long-term. The difference between the two is the benefit period.

Short-term disability coverage only covers you when you are sick or injured for a relatively short period of time. This can range from a couple of months up to a year, depending on the policy.

Typically, short-term disability insurance covers a higher percentage of your income, usually about 60% – 70% of your annual salary.

Long-term disability, on the other hand, can cover you for a significant period of time. In some cases, it can cover you all the way up until the age of retirement.

Because you receive payouts for a longer period, it usually covers a lower percentage of your income. Most long-term disability policies cover around 40% – 60% of your income. Once again, the percentage benefit depends on the policy.

Types of Disability Insurance

Short-term disability benefits are ideal for people who have to undergo surgery and know that they may need to be out of work for several weeks or a couple of months. Long-term disability is for people with more significant injuries and illnesses. In some cases, you may not ever be able to return to work.

Both short-term and long-term options offer either a weekly or monthly benefit, similar to a regular paycheck schedule.

Of course, it is impossible to predict the future. If you want to be fully protected, it is wise to have both short-term and long-term disability policies, as well as a strong life insurance policy. A chronic illness rider is another option to consider.

Buying Disability Insurance

There are three main sources of disability insurance coverage – employer-sponsored, private coverage, and social security insurance.

Employer-Sponsored Coverage

If you’re thinking about taking out a disability insurance policy, check with your employer first. If you can take advantage of employer-sponsored coverage, it is usually the most affordable option because the employer will cover part of the coverage or the plan will be discounted because it is part of a group.

According to the Society of Human Resource Management, some regions require employers to provide disability insurance. These states include California, Hawaii, New Jersey, New York, Rhode Island, and the territory of Puerto Rico.

Private Disability Insurance

If your employer doesn’t offer disability insurance, you can always enter into the private marketplace and get your own disability coverage. Private disability insurance is also usually the best option for self-employed entrepreneurs or freelancers.

Some people who are covered by their employer still choose to take out private insurance as a way to enjoy more coverage. Why? Because some employers put a cap on the amount you can receive.

For example, let’s say your employer coverage maxes out at $60,000 annually. If that’s a significantly small portion of your income, it might be tough to continue living your current lifestyle. With two separate policies, however, you can make up some of that difference. If you are on the upper end of the income scale, it might be smart to carry two separate policies.

private disability insurance

There are some real benefits to seeking private disability insurance. For instance, you’ll have a lot more flexibility in terms of choosing the policy, provider, and terms you want. Plus, you can keep your coverage if you change jobs.

Another big benefit of having private DI is that it allows you to collect benefits tax-free. With employer-sponsored policies, you have to pay taxes on your benefits (just as you would pay taxes on your normal salary).

Social Security Disability Insurance

If you worked in jobs where you paid into social security, you could apply to receive Social Security Disability Insurance. This makes sense for some people, though it can be difficult to qualify for.

The main benefit of Social Security disability insurance is that it is administered by the Social Security Administration and paid for by the government. You also don’t have to be currently employed to collect SSDI (but there are restrictions).

Unlike private coverage, the requirements to collect Social Security disability are extremely strict. You must be unable to do the work that you performed before your illness or injury began. In other words, your medical condition has to be significant and, by definition, be “expected to last for at least one year or to result in death.”

How Much Does Disability Insurance Cost?

The cost of disability insurance depends on a variety of factors. If you go with an employer-sponsored plan, it is usually more affordable than private plans. Social security disability insurance is obviously the cheapest (because it is taxpayer funded), but the eligibility requirements are the most strict.

In general, employer-sponsored and private disability insurance plans are in the range of 1% – 3% of your total income.

The exact benefit amount will vary depending on a variety of health factors. In general, if you are in poor health, or more likely to get sick or injured, you will pay higher premiums.

The health and risk metrics that insurance companies factor into insurance rates include:

  1. Age – The older you are, the more expensive your disability insurance will be.
  2. Health – If you have a pre-existing condition, you’ll pay more.
  3. Gender – Statistically, women file more disability insurance claims, so DI is more expensive for women.
  4. Smoking – If you smoke, your insurance premiums will be higher.
  5. Occupation – If you have a “dangerous” job, your disability insurance will cost more. Examples of dangerous jobs would include construction worker, fisherman, steel workers, etc.

Questions to Ask When Picking a Disability Insurance Policy

As with any type of insurance policy, it’s important to ask questions so that you know exactly what you’re buying before you sign on the dotted line. Before you purchase disability insurance, here are a few key questions that you should ask yourself and/or the insurance provider.

How does the policy define “disability?”

Different policies and providers have different definitions of “disability.”

There are two common definitions you’ll hear – own occupation and any occupation.

Under an “own occupation” policy, you are considered disabled if you can no longer do the job you had prior to becoming injured or sick.

Under an “any occupation” policy, you are considered disabled if you can no longer perform any job at all.

The “any occupation” definition has stricter guidelines and is usually the cheaper policy. Why is it cheaper? Because with the strict definition of disabled, it is less likely you will meet the guidelines. And that means that there is less of a chance that the provider will have to pay you any benefits at all.

questions disability insurance


How much would you need to cover your monthly expenses?

This is a question you need to ask yourself. Before you determine how much money you will need to receive through benefits, think about how much you need to pay your monthly expenses. Take food, housing, utilities, and other monthly bills into consideration to figure out how much you need to get by.

How quickly do you need your benefits to kick in?

Ask yourself when you need to start receiving benefits and ask the insurance provider when the policy starts paying out. With some policies you can receive benefits within the first 30 days – others have a waiting period of 90 days (and sometimes longer).

When you need your benefits to start depends on whether or not you have a safety net to get you through the waiting period. If you live paycheck to paycheck, you’ll most likely want your benefits to start paying out as quickly as possible. If you have some savings you can use for a few months, you’ll have more flexibility.

How long do you need disability benefits to last?

Depending on the extent of your illness or injury, you may want a plan that will pay out for a year or two. Other people may need a plan that will carry them all the way through retirement. Generally speaking, the longer you need the payouts, the higher your premiums will be.

Even if you’re young and healthy, having disability insurance is a worthy investment – even for mortgage protections. Injuries and illnesses happen when we least expect them – so it’s always best to be covered before a situation arises that causes you to be unable to work.

Consider the different types of insurance policies available. Determine if you need short-term or long-term disability. Think about if you want to be insured under an employee plan, through social security disability, or through private insurance. And before you sign on the dotted line, make sure you know the ins and outs of the policy.

Protect yourself with DI and you’ll have peace of mind. Disability insurance is the best way to ensure that you won’t go broke with an illness or injury that prevents you from working.

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