Your most important asset is your ability to earn a living—but could you sustain your family and pay your bills if you couldn't work? The possibility of a disabling injury or sickness may seem unlikely, but statistics paint a different picture. According to the Social Security Administration, at least one in four 20-year-olds can expect to experience a disability before attaining normal retirement age.
Learn how disability insurance works, the types of policies available, and how you can obtain coverage.
Definition of Disability Insurance
Disability insurance, or disability income insurance, provides partial income replacement benefits to eligible workers who are unable to work due to a non-work-related injury or illness, or in some cases, pregnancy. Employees may receive this type of insurance through their employer, a policy they purchase, a state agency, or the Social Security Administration.
Disability insurance doesn't provide job protection, only monetary benefits. Even so, you may secure job protection through state and federal laws such as the Family and Medical Leave Act (FMLA).
- Alternate name: Disability income insurance
How Disability Insurance Works
Disability insurance provides benefits to replace lost income when you’re unable to work because of injury, illness, both, or due to pregnancy. To qualify for the benefits, you must meet the policy’s definition of disability.
Disability benefits won't replace more than 100% of your pre-disability income, and will often replace less. Methods to calculate your disability income benefit differ depending on what type of income benefit you have and whether benefits are provided by a state program, a private insurance company, or the Social Security Administration. That said, two methods are:
- Income benefit formula: The income benefit formula expresses your total benefit payout as a percentage of your pre-disability wages and may also factor in the income you receive from worker’s compensation or Social Security benefits. This percentage varies from policy to policy but may be in the 50-75% range.
- Flat amount: Your benefit payout may be a predetermined dollar amount specified in the policy, typically determined when you purchase the insurance policy. You’ll receive this amount whether or not you receive other benefits during the disability period.
Benefits won't kick in immediately after you are disabled. Disability insurance policy contracts have an elimination period—a specified length of time following the beginning of your disability during which benefits are not payable. The waiting period varies from contract to contract, ranging from a few days to a year or longer. You can choose a waiting period when you buy your policy; a longer elimination period reduces your premium costs.
Disability insurance benefits are often based on the insured person’s earnings. Your disability benefit could decrease after buying coverage if your salary decreases.
Review your policy’s fine print to understand your rights and obligations, as well as what's covered and what's not. Typical disability insurance exclusions are:
- Claims due to preexisting conditions
- Injuries or illnesses resulting from war
- Self-inflicted injuries
- Injuries or sickness resulting from alcoholism, intoxication, or drug addiction
- Work-related injuries
Types of Disability Insurance
If you can't work because you are injured or sick, these types of disability insurance will pay part of your income.
Short-Term Disability Insurance
Short-term disability insurance replaces a specific percentage of your pre-disability income after a brief elimination period, such as two weeks. The benefits payout period varies from policy to policy, but the maximum length of time is usually capped at six months.
Short-term disability insurance may be expensive to buy as an individual, but group coverage is generally less expensive. Companies may offer their employees short-term coverage as a company-paid benefit. A short-term disability policy can gap the elimination period before your long-term disability benefits kick in if you have and need both.
Long-Term Disability Insurance
With a typical elimination period of at least 90 days, long-term disability insurance is generally considered protection against a catastrophic illness or injury. Benefit payments may continue anywhere from five years to retirement or for the remainder of your life, depending on your policy. You can expect to pay a higher premium if your policy carries a longer benefit period.
Short-term and long-term disability insurance policies may have these protection features:
- Non-cancelable: Your disability insurance policy will remain in force as long as you pay your premiums, which are guaranteed not to increase. Benefits, also, cannot be changed.
- Guaranteed renewable: This type of policy is similar to a non-cancelable policy, except premiums can be increased for an entire class of policyholders.
How To Get Disability Insurance
Employer-sponsored coverage is the main source of disability income protection in the United States, often in the form of short-term or long-term group plans. Coverage may be automatic, meaning there's no underwriting or medical exam. Employees also often have the option to increase the baseline coverage the employer provides.
Some companies won't provide disability coverage but will allow their employees to purchase coverage on a voluntary basis. It’s easier to qualify for employer-sponsored coverage, but you’ll want to check with your human resources department to see what coverage and purchase options are available.
Private insurance carriers provide a range of individual disability insurance coverage options. Qualifying for coverage may require a medical exam and policies may cost more than coverage available through your employer. But these policies are portable, so you don't have to worry about losing coverage when you switch jobs.
State Disability Insurance Programs
The states of California, Hawaii, New York, New Jersey, and Rhode Island, and the territory of Puerto Rico provide a partial wage-replacement insurance plan—usually for up to six months—that all eligible workers must pay for through payroll deduction. This can be an important source of short-term income replacement for residents of these states.
The federal government's insurance program automatically covers most workers, but not all qualify for the benefits—about 64% of applicants are initially denied. Disability benefits are considered long term, they’re not for short-term disabilities, and may be available if you have a condition expected to last at least a year or result in death. The benefit amount is generally based on your work experience, your income, and your age. In 2019, the average monthly benefit received was $1,257.65.
- Disability insurance protects your earned income against the risk that disability may make working—and, therefore, earning—impossible.
- Disability coverage is available on a short-term and/or long-term disability basis.
- Both long-term and short-term disability policies include waiting periods after suffering an illness or injury before benefits are paid out.
- Your disability insurance policy will specify the length of time you’ll receive monthly benefits.
- Alternative sources of income such as worker’s compensation and Social Security benefits may reduce the amount you’ll receive in income replacement money.