What Is Disability Insurance?

Disability insurance works by replacing some of your income if you become sick or injured and cannot work. Different policies have different rules about what qualifies someone as having a disability, when the benefits can start and how long the benefits last.

You may be able to get disability insurance through your employer, or you can purchase a policy yourself. The federal government offers benefits for people with disabilities through the Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) programs.

If your disability insurance is provided through your employer, your eligibility for the insurance is based on your employment status. The premiums on employer-provided disability insurance are calculated using general factors like your age, so an examination isn’t usually required. If your employer pays the premium, any benefits you receive from the insurance policy are counted as taxable income.

People who do not receive disability insurance coverage through their employer can purchase a policy as an individual. Individual policies are underwritten, which means your eligibility for a policy and the premium you’ll pay depend on your medical history and other characteristics.

Before you purchase an individual disability policy, your insurer will likely ask you to submit three to five years of medical history and may require you to undergo a medical examination. Because of this, it is often recommended to purchase a disability policy while you are in good health, as it may be more difficult to get affordable insurance if you have an illness or disability.

The length of a disability insurance policy varies depending on the type of policy. Group employer-sponsored policies tend to last longer, some even extending coverage until retirement age.

Individual policies, on the other hand, might only cover two to five years, although some may provide coverage until retirement or up to age 70. However, individual insurance does have the benefit of providing non-taxable benefits, since the premium is paid with previously taxed income.

Disability insurance covers lost income due to an illness or injury. If you become disabled and can no longer work, the policy will pay a percentage of your salary for anywhere from a few weeks to the rest of your working life.

Insurers won’t replace 100% of your income in an attempt to limit the number of fraudulent disability claims. Most disability insurance policies cover between 40%-60% of the policy owner’s salary.

Insurance policies often have income caps and reimbursement limits, so there’s a maximum amount of income you can receive from a policy. If you’re a high-income earner, you may exceed the income cap, and as a result might consider supplemental disability insurance to fill in the gaps in coverage.

Disability insurance coverage is designed to replace working income. Because of this, disability insurance does not cover medical care or long-term care services. Additionally, once you are over 65, disability insurance may no longer provide benefits.

Disability insurance can be beneficial for anyone who has a job and relies on the income they earn from that job. With disability insurance, you’re protecting your livelihood if something happens to you.

A person can become disabled and unable to work at any time, and most working people cannot afford to go more than a few months without a steady source of income. “Disability insurance is one of the best ways to protect your most important asset — your ability to earn an income,” said Barbara A. Pietrangelo, a Certified Financial Planner™ professional and chair at Life Happens. “People get insurance for their house and cars, but most overlook the importance of insuring your paycheck, particularly for unpredictable situations.”

A 2022 fact sheet from the Social Security Administration (SSA) reported that “About 1 in 4 of today’s 20 year-olds will become disabled before reaching age 67.” Despite this, the SSA found that “65% of the private sector workforce has no long-term disability insurance.”

Disability insurance can be even more important if a person has others in their household who depend on them. Parents or guardians with children to take care of or those who serve as the sole provider of their family might consider disability insurance as a backup plan to support their dependents if they can no longer work.

Finally, self-employed individuals and business owners should consider disability insurance. When you’re self-employed, you don’t have sick days or paid vacation to fall back on. Both short-term and long-term disability insurance can be the key to preserving your livelihood as a contractor, freelancer or entrepreneur.

To receive the benefits of your disability insurance policy, you will likely have to submit medical records proving that you’ve contracted an illness or injury that prevents you from working. The qualifications for disability benefits vary based on which type of insurance policy you own.

Short-term disability insurance covers conditions such as surgery recovery or injuries from an accident. Pregnant people can also benefit from this insurance.

Long-term disability insurance covers illnesses and injuries, such as cancer, stroke, mental health issues or arthritis, that might prevent someone from working for multiple years.

Disability insurance does not usually cover pre-existing conditions. If an illness or injury was found before the disability coverage began, the condition is probably not covered.

The two types of disability insurance are short-term and long-term disability insurance. Both policies provide benefits for people who are unable to work due to injury or illness. The main difference between the two types is how long they provide benefits for.

Short-term disability insurance covers lost income due to a disability for a short period of time, usually between a few weeks and a year. Long-term disability insurance coverage spans a longer time frame, from two years up to the rest of the policyholder’s working life.

Other differences include the type of conditions covered by each policy, when the coverage starts and how much of a person’s wages are provided by the policy.

Both types of disability insurance cost about the same, roughly 1% to 3% of your annual salary. That said, the cost of disability insurance varies and is dependent on several factors, most importantly your age and your health.

Like life insurance, the younger and healthier you are, the less you will pay in premiums. If you have a pre-existing condition that makes you more likely to become disabled, you’ll probably be charged a higher premium. You may also be denied coverage altogether, or your condition might be excluded from coverage by the policy.

Your income also factors into disability insurance premiums. Because disability benefits are a percentage of the policyholder’s income, insurers will pay less benefits to a policyholder with lower income. Therefore, the less money you make, the less you’ll pay in premiums.

If you aren’t provided disability insurance coverage through your employer, you can purchase a policy from a private insurance company.

As with purchasing any insurance policy, it’s important to research the provider extensively. You can check financial strength ratings from credit rating agencies like AM Best, which tell you how financially stable the provider is. You can also look at reviews on sites like the Better Business Bureau (BBB) to see what other customers have said about the company.