Disability insurance can provide you with a steady paycheck in the event that you become unable to work due to injury or illness. There are several types of disability insurance to choose from, and some types are offered by your employer while others you pay for yourself. Each type of disability coverage has its own set of characteristics and benefits, and you need to know the features of each type of disability insurance in order to know which policy is right for you.
Here is a breakdown of all of the types of disability insurance on the market today:
- Short-Term Disability Insurance
- Long-Term Disability Insurance
- Three Sub-Categories of Own-Occupation
- Remaining Types of Disability Insurance
Short-term disability insurance
This type of disability insurance will usually only pay benefits for a short period of time, such as one to two years. But its elimination, or waiting period (the amount of time that you have to be disabled before the policy starts paying anything) may be as short as one month.
Short-term disability policies are often available as an employee benefit, and some states either require employers to offer this benefit or else have their own state-run short-term disability policies that all residents of the state can sign up for.
Short-term disability policies can replace up to 80% of your gross income during the benefit period (the amount of time that the policy pays you). Most short-term disability policies cost the same as long-term disability policies, so if you have sufficient savings to cover your expenses for a year or two, then this type of insurance may not be necessary.
Long-term disability insurance
This is the most important-and most popular-form of disability coverage on the market today. Most individual disability insurance requires you to be disabled for at least two years before they start paying out, but the average length of a disability is about 34 months, so this type of coverage can sustain you if you become disabled for a period of years.
Some long-term disability policies will pay for up to 5 years while others will pay 10 years’ worth of benefits. Some policies will even pay you until you reach retirement age (usually age 65).
Long-term disability insurance plans will usually pay you a maximum of 60% of your previous earnings every month, but this income is tax-free as long as you have not deducted the cost of the premiums on your tax return or your employer paid for this coverage with pretax dollars.
There are two key types of long-term disability insurance. Own-occupation insurance will pay you if you become unable to work a job in your own occupation.
- For example, if you are a doctor and you become incapacitated in a car accident, then an own-occupation policy would pay out if the insured can no longer work as a doctor. Any-occupation coverage will only pay out if you become completely unable to work any type of job. Of course, this type of policy costs less than own-occupation disability insurance, but it can be difficult to qualify for benefits if you are still able to perform some menial type of work.
Three Sub-Categories of Own-Occupation Policies
- “True” own-occupation policies – These policies will pay you if you become unable to work in your chosen occupation, even if you get another job.
- “Transitional” own-occupation policies – This type of policy will pay you the difference between what you were earning before the disability occurred and what you’re earning now, assuming that you are able to work a job that pays less than what you made before.
- “Not Engaged” Own occupation policies – This type of policy will only pay disability benefits until you find another job, regardless of how much (or little) the job pays.
Remaining types of disability insurance
- Mortgage Disability Insurance – This type of long-term disability coverage will cover your mortgage payment if you become unable to work for an extended period of time. You can get this type of coverage from your mortgage lender in most cases, although these policies are also sold by insurance agents and brokers. These policies will pay your mortgage lender directly, so you never have constructive receipt of the money. These policies can also cost more than other types of long-term disability policies because they usually have little to no underwriting requirements. For this reason they are popular with people who have health issues or work in hazardous occupations such as law enforcement or construction.
- Supplemental Disability Insurance – This form of insurance will pay you the difference between what you are receiving from your employer’s short or long-term disability policy and your actual monthly expenses.
- Social Security Disability Insurance (SSDI) – This is paid by the Social Security Administration and is the hardest type of disability insurance to qualify for. Over half of all initial applications are rejected, and the average monthly benefit amount is just over $1,000.
- State Disability Insurance – There are a few states in America that sponsor their own short-term disability insurance policies, which must be paid either by the employer or employee, or both. This benefit is generally only available for a year at most.
- Business Overhead Expense Disability Insurance – This type of disability plan will cover your business expenses if you are self-employed and become unable to work. The insurance company can cover items such as employee compensation and benefits, rent, utilities, payroll taxes and other costs of running a business. This type of insurance is usually sold in conjunction with a personal long-term disability policy, because Business Overhead insurance won’t pay the business owner’s income.
- Workers’ Compensation– Many employees rely on this form of coverage to pay them if they become unable to work, but this type of coverage only applies to those who are injured on the job. Those who become disabled from an off-the-job event are not covered.
There are many types of disability insurance, and carrying the appropriate form of coverage is foundational to your financial plan. Statistically speaking, you are much more likely to become disabled for a period of time in your life than you are to die prematurely. Consult your financial advisor or life insurance agent for more information on disability insurance and which type is right for you.