Disability insurance is exactly what it describes: insurance that kicks in if you are ever disabled and unable to work.
Check to see if your employer provides disability insurance. It usually does with short-term disability insurance and long-term disability insurance.
You'll have to ask your HR department or benefits department exactly how many days/weeks each type of disability insurance provides and how much income (percentage of total income and number of days).
Let's go through the basics of disability insurance in more detail. If you already know the basics, you can hop over to my post on how to get disability insurance and maximize benefits.
What Is Disability Insurance?
Disability insurance is income insurance. You get paid income in case you experience a disability and are unable to work. The insurance usually kicks in after you file, or after your short-term and long-term disability insurance provided by your employer runs out.
One of the most common ways employees use employer-sponsored disability insurance is after giving birth.
Your disability insurance may not replace your entire income, but some of your income is better than none.
Who Needs Disability Insurance?
Nobody needs disability insurance, just like nobody needs any type of insurance. But bad things do happen in life, and those who enjoy the peace of mind of having insurance should benefit.
Below are the following types of people who may want to get disability insurance:
- May have a chronic health issue
- Work in a riskier line of work (roofer, miner, utility engineer, etc)
- Have dependents who do not work
- Feeling burnt out and need some more peace of mind
- People who only have one source of income instead of a variety of passive income streams
The Social Security Administration estimates 1 in 4 Americans entering the workforce this year will miss extended work time at some point during their careers because of a disability.
Further, roughly 1 billion people, or 15% of the world's population has some sort of disability in vision, movement, hearing, comprehension, speaking, an so forth.
If an injury or illness prevented you from working, disability insurance could kick-in to keep you floating for a while.
Typical Disability Insurance Coverage
If disability insurance kicks in to help supplement or replace lost work income, typical disability insurance policy would cover up to 60 percent of your income.
Therefore, it's a good idea to practice living on just 60 percent of your income and saving and investing the rest. This way, if disability insurance ever kicks in, you won't have to make any budget adjustments.
Check out Policygenius for affordable disability insurance quotes.
Other Disability Insurance Programs
Work-Provided Short-Term Disability: Short-term disability insurance from work usually provides up to three months of coverage. After your short-term disability runs out, you need to get long-term disability insurance.
Work-Provided Long-Term Disability: Most long-term disability insurance policies pay out for two, five, or 10 years, or until retirement, and a five-year benefit period is typically enough to cover people; according to the Council for Disability Awareness, the average individual disability claim lasts for a little under three years
Social Security Benefits: The Social Security Administration can pay long-term disability benefits. But, getting approved takes a while. In 2018, the average disability benefit was about $1,150 a month.
Workers’ Compensation: The law requires this coverage if you’re injured and become disabled while performing your at-work duties. If your disability happens away from work Workers’ Comp won’t help.
State-Funded Programs: A few more progressive states — California, Hawaii, New Jersey, New York, and Rhode Island, for example — offer short-term disability coverage for state residents. These benefits usually last only 90 days.
Severance Package: In 2012, I negotiated a severance package after 11 years with my company. The severance package came with a one-time severance check, six months of COBRA fully paid, five years of deferred cash and stock compensation, and state unemployment benefits for up to 26 weeks.
Although I was not disabled, my severance package gave me the courage to leave my day job and keep me afloat for five years while I pursued my passions of traveling and writing. Read my book on exactly how to negotiate a severance package, which was recently updated.
If you need more disability insurance, this is when you can get extra coverage through the private disability insurance route.
Limitations of Disability Insurance
Whenever you buy an insurance policy, you need to know exactly what it covers and what it doesn't cover. You also need to know how long you get coverage for.
When you’re first injured or disabled, your disability insurance won’t pay your claim right away, even if the disability is clearly qualified for coverage.
Instead, you’d complete a waiting period which the insurance industry calls an elimination period.
- Short-Term Elimination Period: Most short-term policies require at least a two-week wait before a policyholder can begin receiving funds.
- Long-Term Elimination Period: Long-term policies’ elimination periods vary. You can find 30-day to 365-day elimination periods.
The purpose of the Elimination Period is to prevent disability insurance fraud and to potentially make resolutions that would not require disability insurance to be paid out. For example, maybe your mental or physical injury heals faster than expected.
You can think of an elimination period like a health insurance deductible or co-pay when seeing a doctor. If it costs a $25 co-pay to see the doctor each time, you might not go as often compared to if there was a $0 co-pay. If you have a $10,000 deductible before any treatment is made, chances are that you will only go to the hospital during an emergency.
Shorter elimination periods lead to higher premiums just like lower co-pays and lower deductibles lead to higher monthly health insurance premiums.
Therefore, you need to calculate whether your emergency fund or liquid investments can cover the typical elimination period of your policy.
I always recommend having at least six months worth of full living expenses in savings. It'll make you feel less stressed. Further, you can now get a decent online savings rate after the Fed raised interest rates multiple times since the end of 2015.
Own-Occupation and Any-Occupation Coverage
There are two types of disability insurance coverage:
- Own-Occupation: Will replace part of your income if your disability prevents you from working in your specific field even if you could find work in another field. For example, if you make $5,000 a month as a welder and burn your hand badly, your disability insurance may pay $3,000 a month after the elimination period is over.
- Any-Occupation: Will replace part of your income only if your disability prevents you from finding any work in any field. You might injure your back as a professional athlete, but you might still be able to work as an announcer like Klay Thompson did for the Warriors after he tour his ACL. But if he someone couldn't do anything else to earn, an any-occupation policy would kick in.
Most folks elect an own-occupation policy because most of us just know how to do one main thing to make money.
Benefit Periods For Disability Insurance
The longer the benefit period (payout of income), the more expensive the policy and vice versa.
As mentioned previously, short-term disability policies usually go up to three months. Therefore, when talking benefit periods, we're mostly focused on long-term disability insurance policies.
Think about the length of your benefit period based on your age and your desire to work.
If you're 52 years old, sick of your job, and really want to retire at age 60, then get at most an 8-year benefit period.
If you're 38 years old and still have a lot of love for your job, perhaps you might only want a one or two year benefit period.
Chances are good you WON'T suffer from a work-stopping disability. All the same, insurance is all about covering those unfortunate situations.
You could find a long-term policy to replace your income until you reach retirement age, but the premiums would cost a lot more.
Disability Insurance Payout Amounts
Depending on your policy, your long-term disability (LTD) plan will typically pay between 50% and 80% of your “pre-disability earnings,” up to a maximum. The average disability insurance payout is roughly 60%.
All LTD plans have a maximum monthly payment, which can range in between $4,000 per month to $25,000 per month.
If you've been approved for benefits, you can expect your benefits to increase 1% to 3% each year if your policy contains a cost-of-living adjustment (COLA). The COLA may be part of your basic coverage or offered as an optional rider, and it is usually indexed to a well-known measure of inflation, such as the Consumer Price Index (CPI).
That said, with inflation running a lot higher than the historical average, expect COLA adjustments for disability insurance to be even higher. COLA adjustments for Social Security benefits are up a lot.
For example, in 2023, COLA rose 8.7%, that's huge!
Exclusions From Coverage
Disability insurance won't cover everything. These are the most common exclusions:
- Dangerous hobbies, such as skydiving or scuba diving.
- Injuries sustained during wars, protests, or riots.
- On-the-job injuries (Workers’ Comp should help instead).
- Suicide attempts or other intentional harm.
- Pregnancy and normal childbirth.
- Alcohol or illegal drug-related injuries.
Disability insurance may not pay — or you may be denied coverage — if your disability results from a medical condition you already had when you bought the policy (pre-existing condition).
How Much Does Disability Insurance Cost?
Disability insurance costs about 1 to 3 percent of your annual income. If you earn $100,000 a year, you may pay between $1,000 and $3,000 a year in premiums.
You can save money by having disability insurance with a shorter benefit period, longer elimination period, lower payout, and other exclusions and vice versa.
Other Factors Impacting Your Premiums
Surprise, surprise, not everyone can get the same type of disability insurance at the same price. The following factors may affect the cost of your disability insurance:
- Health: The healthier you are, the lower the premiums.
- Age: The younger you are, the lower the premiums.
- Sex: Men file more claims than women, which means men tend to pay higher premiums.
- Income: The higher your income, the higher your premiums because the higher the income you are going to protect.
- Tobacco: Smokers and vapers usually pay higher premiums.
- Your job: Riskier occupations require higher premiums.
- Pre-existing conditions: Unfortunately, through often no fault of your own, if you have pre-existing conditions, you will probably have to pay higher premiums or sometimes might get denied.
Make sure you understand all the details.
These factors — along with your policy features — will work together to determine your premium.
Can Everybody Qualify For Disability Insurance?
Unfortunately, not everybody can qualify for long-term disability insurance. Federal law regulates Social Security disability benefits and sets automatically qualifying disabilities.
The Social Security Administration publishes its “Blue Book” which includes a long list of health conditions that could qualify for disability benefits.
A private disability insurance policy does not need to follow the Social Security Administration guidelines and will set its own standards. Please make sure you understand all the details.
Errors People Make With Long-Term Disability Insurance
Here are three common mistakes people make when it comes to collecting long-term disability insurance:
1) Quitting your job before filing LTD benefits. Some individuals quit their jobs because they're unable to work and then try to file for LTD benefits. Unfortunately, under many group policies, disability coverage ends once the employment relationship has terminated. Besides, you never want to quit your job anyway. You want to engineer your layoff by negotiating a severance.
2) Reducing your work hours. Because monthly LTD payments are often calculated using the employee's pre-disability salary, transitioning to a lower-paid position or part-time role could reduce your monthly benefits significantly (because your “pre-disability” earnings will be lower than when you were working full-time or at full capacity). It's a tough situation because less work could help lessen your disability or prevent a disability.
3) Transferring to a less strenuous job. Many LTD policies define “disability” as the inability to perform the duties of one's own occupation, so transitioning to a less strenuous job before applying for benefits can actually make it harder to be found disabled. The insurance company will use the less strenuous job you've been doing as the standard for whether you can work.
Bottom line: To get maximum LTD coverage and benefits, make sure you file a LTD claim while you are still employed at your regular occupation.
In order to get your short-term and long-term disability insurance approved, you need proof that you are disabled. Proof is found by going to a medical doctored who exams you and then verifies that you are disabled. Your doctor must send a note into your employer and insurance company about your disability.
The Best Way To Get A Good Disability Insurance Policy
The best way to get a good disability insurance policy is to shop around online. This is why Policygenius is so great. You input your request and the site will provide multiple quotes for you to evaluate, all in one place.
Policygenius is a much more efficient process than having to apply one-by-one to each disability insurance carrier.
Here's what to look for in a disability insurance carrier and policy:
- Reputation: Insurance companies get graded by independent analysts such as A.M. Best and Moody’s. Better grades (A+, A++, AAA, etc., instead of Bs or worse) mean the company has more financial stability and should be in a better position to pay your claim if needed. The more positive reviews, the better.
- History: Has the insurance company been around for several decades? If not, you may want to pass because if the insurance company goes bankrupt, you may have difficulty getting paid.
- Variety Of Options: You want to get a disability insurance policy that is right for you. The more options, the better so you don't have to fit your situation to the limited options.
The first step to decide whether you need long-term disability is to check with your currently employer to see if they already have a short-term and long-term disability program in place for you. If not, evaluate your needs, and get a free quote online.
If you have dependents, I highly recommend getting disability insurance, no matter your occupation. Get free disability insurance quotes all in one place with Policygenius.
Also Consider Purchasing Life Insurance
I also highly recommend getting life insurance as well. You always want to take care of your loved ones, no matter what happens.
The best way to get life insurance is through Policygenius as well. They started off as a life insurance marketplace and have a comprehensive suite of qualified life insurers looking to compete for your business. Applying is easy and free.
Related: All The Life Insurance Options To Protect Your Family
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