A disability that puts you out of work could be more debilitating than you’ve planned for. 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.
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.
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. The elimination period usually ranges from one to 90 days for short-term disability insurance or 7, 14, 30, 60, 90, 180, 360 or 720 days for long-term disability.
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.
Short-term disability insurance typically pays 80% of your salary, and long-term disability insurance replaces around 60% of your income. While your salary is taxed, disability benefits aren’t — so the final amount can come pretty close to what you were taking home before your disability.
Short-term vs long-term disability insurance
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. It’s best for 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.
Is disability coverage worth it?
If you don’t have enough savings or funds to cover your daily living expenses for a few months, you might need disability insurance. But there may be some circumstances where disability insurance isn’t a necessary safety net in case you become disabled.
Consider disability coverage if:
You’re the breadwinner of your family
You don’t have any coverage through your job
You’re paying off debt
You’re a caregiver
You’re in an injury prone profession
But you might skip disability coverage if:
You have enough money. If you’ve got enough savings, you may be able to self-insure to cover the risk of not being able to work.
You’re in the military. If you’re in the military, you could have a disability policy provided through your military benefits.
You have family to rely on. If you have a trust fund or your spouse makes enough money to support the family if you couldn’t work, you might not need disability coverage.
Social Security disability is enough. If you don’t need much money and you’re content with the amount you’d receive from Social Security disability, you might be okay without purchasing a disability policy.But keep in mind qualifying for Social Security disability can be a difficult process.
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:
A disabling injury — like a broken leg or hand
A prolonged sickness — such as glandular fever
A musculoskeletal disorder — including arthritis, back pain or spine and joint disorders
A chronic digestive disorder — like gastritis
A mental health condition — such as anxiety or depression
Pregnancy and maternity leave
Musculoskeletal and connective tissue disorders — like osteoarthritis, chronic back pain or slipped disks
Accidental injuries — like brain trauma caused by a car accident
Cardiovascular disorders — such as heart attacks or serious heart conditions
Circulatory disorders — like coronary artery disease
Prolonged mental illnesses — including PTSD and major depressive disorders
What happens if I’m disabled but can still work?
The answer lies in your insurer’s definition of disability and whether you can work at all. 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 only 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 at all.
Which one should I pick?
Own-occupation policies are typically more helpful to people with physically demanding or high-paying jobs, such as doctors or dentists. Any-occupation policies mean you have to go down the list of possible careers and prove you can’t do any of them before the policy will pay out.
For example, say you make $200,000 as a doctor and your hand is damaged during a surgery you’re performing. An own-occupation policy would pay you around 60% of your salary until you could return to work. An any-occupation policy might not pay out if you could still work as a receptionist making $30,000.
How much is 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.
How do I save on disability insurance?
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.
Where can I 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.
What should I watch out for?
When purchasing your policy, you’ll want to make sure you fully understand your benefit options and exclusions before committing to a policy. Here are some things to keep an eye out for:
Waiting period. Sometimes referred to as an elimination period, this is the amount of time you’ll have to be out of work before receiving your first disability check. Make sure you know how long you’d be able to go without your income before choosing a waiting period.
Exclusions. Make sure you’re fully aware of any specific conditions or situations that won’t be covered. Also, you’ll want to know the amount of time you’ll have to wait before pre-existing conditions are covered.
How to file your claim. Check with your potential insurance provider to see how exactly you would file a claim and what information you will have to keep to prove your disability.
Denials and appeals. Talk with your disability provider to find out what happens if a claim is denied and what the appeal process involves.
What are the alternatives to disability insurance?
Disability insurance might be an option if your careers would be limited by a disability. However, it’s not right for everyone. You might instead rely on:
Life insurance might be a better option for you if your family would be finacially devastated by your loss, moreso than if you became disabled. While disability can help replace your paycheck while you can’t work, life insurance could replace your paycheck for your family if you died.
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. If you don’t have a high risk job, you’re typically not likely to become disabled at work.
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.
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.
Frequently asked questions about disability insurance
You may want disability insurance if you’re in one of these situations:
You have dependents whose lives would be greatly affected by your disability
You don’t have substantial savings to replace lost income or
You don’t want to touch other savings if you can’t work
You have debt like a mortgage, student or personal loan
You need a backup childcare plan for stay-at-home parents
For private disability insurance, your coverage may be affected by the types of disabilities you have and when you receive those disabilities. A few situations can happen:
You have both long- and short-term disabilities. Your policy should list specific conditions or criteria for conditions that qualify. Let’s say you suffer from both long- and short-term disabilities but only bought a long-term policy. Your insurance company will only pay out benefits based on the long-term disability.
Your conditions qualify as a disability when assessed together. Most Social Security disability applicants list multiple conditions that may not be disabling by themselves. But the conditions may qualify as a disability when put together or because minor ones exacerbate a more serious condition. Whether you’re filing for government or private benefits, you can list all disabilities you currently have to build a strong case for your claim.
You get diagnosed with a new disability while receiving benefits. This situation involves many factors, such as when the benefits end for your previous disability, whether the disabilities are related and your insurance policy agreement. Insurers will likely assess the new disability on a case-by-case basis. Be prepared to give a strong argument and medical evidence that you qualify for further benefits.
Only a few states offer government-run disability benefits, including California, Hawaii, New Jersey, New York, and Rhode Island. These states offer partial replacement income for illness, injuries, pregnancy complications or recovery from childbirth.
You might compare your eligibility, potential payouts and the illnesses covered from your state program before forgoing a private disability policy.
The exclusions can vary by insurer, but look at your policy for these common exclusions or limitations:
Conditions caused by mental or nervous issues
Conditions caused by substance abuse, including prescription drugs
Katia Iervasi is a writer from sunny Sydney, Australia. Her writing — and curiosity — has taken her around the world, and she now calls chaotic, creative New York home. With a journalistic eye for detail, she navigates insurance, mortgages and finance for Finder, so you can splash your cash smartly (and be a pro when the subject pops up at dinner parties).
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