How Disability Insurance Works

Disability insurance is a type of insurance that provides a percentage of someone’s income if they suffer a non-work-related illness or injury and are unable to work.

Disability insurance is available from private insurance companies, often through one’s employer. In addition, the US federal government offers disability insurance through the Social Security System.


Why Do You Need Disability Insurance?

An injury or illness suffered off the job that prevents someone from working happens fairly frequently. According to the Social Security Administration, more than 25% of people in their 20s will suffer a disability that lasts for at least 90 days before they turn 67.

There are many types of injuries that could lead to short- or long-term disability. These include spinal cord injuries, heart attacks, back injuries, and illnesses such as diabetes and cancer.

How Does Disability Insurance Work?

Disability insurance doesn’t just cover injuries like a broken bone or sprained ankle. It also covers illnesses like cancer, depression, diabetes, heart disease, or anything else that prevents you from working.

There are several types of disability insurance:

A separate type of insurance policy, workers’ compensation insurance, is intended to cover an employee’s medical expenses and other financial losses if they are injured on the job.

A disability insurance policy has information about things that affect your benefits. These include:

  • The premium amount - Like other types of insurance policies, disability insurance requires paying a monthly premium to remain active.
  • What constitutes a disability - Different policies have different requirements for the types of disabilities they cover. Some policies cover injuries that keep you from working at the job you used to have, even if you can do another job for less money. Other policies only provide benefits if you’re completely unable to work.
  • Benefit amount - Depending on the specific policy, you can expect to earn about 60% to 80% of what you earned before you were injured.
  • Benefit duration - Like all insurance benefits, disability benefits are limited in duration. They may last for a few months, a few years, or until you reach a specified age.

Types of Disability Insurance

Now that we’ve explained how disability insurance works, let’s dive into the specific types of disability insurance.

Short-Term Disability Insurance

Short-term disability insurance provides benefits if you suffer a temporary illness or injury. Employer group plans usually provide short-term disability insurance.

Although this type of policy is available on the open insurance market, it often isn’t worth the money. You typically receive 40% to 60% of what you made before you became disabled, and benefits usually last no more than a year. As a result, the premiums may end up costing more than the benefits.

Musculoskeletal disorders, mental health problems, digestive disorders, and pregnancy are the most common reasons people file short-term disability claims.

Long-Term Disability Insurance

Long-term disability insurance provides benefits if you suffer a long-term illness or injury that prevents you from working for months or years. The type of policy provides benefits until the disability ends or for a set period of time, such as 10 years or up to age 65.

This type of disability insurance can be purchased through a group plan or on an individual basis. Although it’s more expensive than short-term disability insurance, most experts agree that it’s worth more in the long run because benefits are much higher – about 60% to 80% of the income you earned before becoming disabled.

Long-term disability claims are most frequently filed due to cancer, mental health problems, serious injuries, musculoskeletal disorders, and pregnancy.

Social Security Disability Insurance

Social Security Disability Insurance (SSDI) is a disability insurance program administered by the Social Security Administration. SSDI has stringent eligibility requirements that not everyone can meet. For example, you must:

  • Work for enough time and recently enough in a job covered by Social Security
  • Become disabled according to the Social Security Administration’s definition
  • Meet specific income requirements

State Disability Insurance

Five states, including New Jersey, New York, Rhode Island, California, and Hawaii, require employers to offer disability insurance coverage to their employees. These plans have significant coverage and benefits limitations that are specific to each state.

Cost of Disability Insurance

Disability insurance typically costs about 2% of your annual salary. However, the exact amount depends on a variety of factors, including:

  • Age: As with life insurance, older people pay more for disability insurance, all else being equal. This is simply because older people are more likely to become ill or injured.
  • Gender: Unlike with life insurance, men pay up to 40% less than women for disability insurance because they file fewer claims on average.
  • Medical history: Just like a health insurance policy, a disability insurance policy will charge higher premiums for someone with a problematic medical history. If you have used or are using tobacco, have a chronic disease or a family history of one, are overweight, or have other medical issues, you will pay more for disability insurance.
  • Occupation: More dangerous occupations, such as construction workers, police officers, and firefighters, have higher disability insurance premiums. In addition, someone who has a physical job that can’t be done from a wheelchair while recovering from an injury will pay more for disability insurance.
  • Annual income: Because disability insurance benefits are proportional to your annual salary, the more you earn, the more you will collect in benefits, and thus, the higher your premiums will be.
  • Place of residence: If you live somewhere with more stringent regulations, a higher number of annual claims, and/or a higher cost of living, you will have higher disability insurance premiums.

Disability Insurance for Small Businesses

Disability insurance is a perk that many employees will appreciate, as it provides peace of mind that they will still have income if an injury or illness prevents them from working. Business owners can be covered by disability insurance as well.

That said, small business owners are only required to provide disability insurance for their employees in New Jersey, New York, Rhode Island, California, and Hawaii. By contrast, most states require small businesses to carry workers’ compensation insurance for work-related injuries if they have employees.

How to Get Disability Insurance as a Small Business

To purchase disability insurance as a small business owner, you normally must show that your business has made a profit for at least the past two years. This information, on which the disability coverage amount will be based, probably will require producing tax returns.

There are some exceptions to the rule above, including:

  • Your business has signed contracts that show it will make a certain amount of income in the future.
  • Your previous job and current business are in the same industry.
  • Your business is in a field that has a high earning potential, such as the fields of medicine, law, accounting, or architecture.

Note that disability insurance won’t help pay employees’ salaries, rent, utilities, and other overhead costs if a small business owner becomes ill or injured and can no longer operate the business. Business overhead expense disability insurance covers this situation.

Disability Insurance Frequently Asked Questions

How much does disability insurance cost a month?

The cost of disability insurance depends heavily on a number of factors. These include your age, gender, medical history, occupation, annual income, and place of residence, as well as whether you get a short- or long-term policy.

That said, expect to pay about 1% to 4% of your annual income for disability insurance.

What is not covered by disability insurance?

Work-related injuries aren’t covered by disability insurance. Instead, they’re covered by workers’ compensation insurance.

You may be unable to get disability insurance if you have a serious pre-existing medical condition such as a heart attack or cancer. In addition, if you’re over 65, you may not be eligible for disability insurance, or it may be unaffordable. In other cases, you may be approved for disability insurance with a pre-existing condition, but your policy may exclude any disability resulting from that condition.

Certain other situations that can cause disabilities typically aren’t covered either, such as committing crimes, being injured in prison, fighting in a war, or intentionally injuring yourself.

Is disability insurance a good idea?

Disability insurance is often a good idea, especially if you have a job with a high injury rate. However, if you work in a relatively safe profession, you may not need it.

Can I lose my job if I am on disability?

Yes – being on short- or long-term disability doesn’t necessarily mean your job is protected.

However, many workplaces are subject to the Family and Medical Leave Act (FMLA), which provides you with 12 weeks of unpaid leave annually if you or an immediate family member has a medical problem. You can’t be fired while on FMLA leave, and during that time, you can receive your disability benefits.

How much of your salary do you get on long-term disability?

On average, a long-term disability insurance policy pays about 60% to 80% of your annual salary. Policy benefit amounts and benefit periods vary, and you have leeway to set the amount of your benefit while shopping for one.

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