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Disabilities are more common than you might think, with roughly one in four 20-year-olds today likely to become disabled before they retire, according to the Council for Disability Awareness. That’s where disability insurance comes in. It can protect your livelihood and replace a portion of your paycheck if you can’t work due to an illness or injury.
Compare disability insurance companies
What's in this guide?
- Compare disability insurance companies
- What is disability insurance?
- How does disability insurance work?
- What qualifies for disability benefits?
- How to get disability insurance
- Average cost of disability insurance
- What happens if I’m disabled but can still work?
- Is disability insurance worth it?
- Bottom line
What is disability insurance?
Disability insurance pays out a percentage of your salary if you’re unable to work due to a covered injury or illness. It replaces part of your paycheck for a specified period of time, and each insurer has a list of disabilities that qualify for benefits.
There are two types of coverage:
- Short-term disability insurance (STD) typically replaces 60% to 80% of your paycheck for three months to a year.
- Long-term disability insurance (LTD) usually replaces 40% to 60% of your paycheck for 2, 5 or 10 years, or until you reach retirement.
How does disability insurance work?
When you apply for a policy, you’ll need to choose an elimination period. Also called a waiting period, this is the length of time you’ll wait before you start receiving benefits. It starts on the day you become disabled.
With short-term disability insurance, the elimination period usually ranges from one to 90 days. And with long-term disability insurance, the options are usually 7, 14, 30, 60, 90, 180, 360 or 720 days.
To decide on an elimination period, think about how long you could pay for your bills and living expenses out-of-pocket before your coverage kicks in. The shorter the elimination period, the higher your premium.
Once your elimination period ends, the benefit period begins and you’re eligible to collect benefits. The benefit period for STD tends to be limited to 30, 60, 90, 180 or 365 days, while LTD pays out up to a specific age or for a set number of years. After the benefit period is over, you’ll stop receiving disability benefits.
How long should your disability elimination period last?
Does life insurance cover disability?
Unfortunately not. Life insurance policies don’t have clauses for disability, which means you won’t get a payout if you become fully, partially or temporarily disabled.
What’s the difference between worker’s compensation and disability insurance?
Worker’s compensation protects employees who get injured or become ill on the job, while disability insurance can cover debilitating health conditions or injuries on and off the job, depending on your policy.
What qualifies for disability benefits?
It depends on your insurer, and the type of disability insurance coverage you have. But generally, these conditions are covered under each policy:
|Short-term disability||Long-term disability|
How to get disability insurance
If you’re sold on the idea of securing a “replacement paycheck” in the event you can no longer work, here’s how to go about it:
- Check for employer-sponsored coverage. In California, Hawaii, New Jersey, New York and Rhode Island, employers are legally required to offer short-term disability plans to their employees. If you live outside those states, it’s worth asking your workplace if STD is offered as part of your employee benefits.
- Buy an individual policy. You can purchase a policy directly from an insurance company. The major benefits of choosing this option are that the coverage is portable, and you’ll be able to customize your elimination and benefit periods to suit your financial situation. Just be sure to shop around to get the best possible rate.
- Go through a professional association. Some professional associations partner up with disability insurance companies to offer policies at discounted rates.
Average cost of disability insurance
Your premium will come down to your coverage amount, benefit and elimination period, occupation, health and where you live. To give you an idea of how much you might pay for coverage, the average cost of a long-term disability insurance policy is 1-3% of your annual salary. So, if you earn $65,000 a year, you might pay between $650 and $1,950 a year.
To cut down on your premium, you can:
- Increase your elimination period. All long-term disability policies have a waiting or elimination period. Basically, this is the time between the start of your disability and when the insurance company begins paying out your benefits. The shorter the waiting period, the more expensive the policy. If you choose a waiting period of 90 days or longer, you can save. However, in the meantime, you’ll need the savings to self-insure or put in place a short-term disability policy — which you may be able to get through your employer.
- Decrease your benefit period. The benefit period is the amount of time your policy will pay out benefits. The shorter the period, the cheaper the premium. The longest benefit you can get is until retirement age — for most carriers, that’s 67, though some can go up to age 70. The average disability lasts three years, so you might want to consider a benefit period of five or 10 years.
- Reduce your monthly benefit. The maximum monthly benefit most companies pay is between 60% and 70% of your current gross salary. If you think you can manage with less money, you can lower your monthly benefit, thereby lowering your premium. This can be a risky option, though, as disabilities can be costly.
What about Social Security Disability Insurance?
Social Security Disability Insurance (SSDI) is a program that pays benefits to people with total disability who haven’t been able to work for a year or more. However, it’s difficult to get approved and the average amount you’d receive each month is less than $1,200 – so don’t count on it as a surefire plan.
To qualify, you must prove an “inability to engage in any substantial gainful activity” due to medical reasons for at least a year. Additionally, you must have previously worked in jobs covered by Social Security, and you must meet the Social Security Administration’s “disabled person” criteria, which includes severely limited mobility and a monthly income of less than $1,220 a month.
It’s also worth mentioning that 65% of people who file a claim for SSDI are denied, due to the strict criteria to be considered disabled. If you’re declined, you can appeal the decision, though the process can be long and you may have to file several appeals.
What happens if I’m disabled but can still work?
The answer lies in your insurer’s definition of disability. There are two types of plans:
- Own-occupation disability insurance pays out if you can’t work in your usual occupation, but you can work a different job.
- Any-occupation disability insurance pays benefits if you can’t perform any job. To qualify, you’ll need to prove you don’t have the physical or mental capacity to work.
Is disability insurance worth it?
If you rely on your income to survive and don’t have substantial savings, a disability insurance policy can offer peace of mind. If you become disabled and can no longer work, your coverage will kick in to replace part of your income so you can cover your living and medical expenses.
The best type of policy for you depends on your financial situation. Short-term disability insurance can replace up to 80% of your salary, but the benefit period is limited. As such, it suits those who don’t have an emergency savings fund to fall back on.
On the other hand, long-term disability insurance lasts several years or even until retirement, when Social Security steps in. The list of covered illnesses and injuries is far more comprehensive, and includes the likes of arthritis, back pain and heart disease. However, it’s usually more expensive, so factor that into your decision.
Disability insurance pays benefits if you become disabled and can’t work, making it the truest form of income replacement. A policy can help you to cover your living and medical expenses until you’ve recovered from an injury or illness. You can choose between short-term and long-term coverage, which have different elimination and benefit periods — but neither will replace your entire paycheck.
Explore your options by comparing disability insurance companies.
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