What is disability insurance? Everything you need to know

For many adults, our ability to work and earn our livelihood is something we take for granted. Whether you work a typical 9 to 5 or own your own business, most of us assume that we’ll be able to bring home a paycheck until the day we’re ready to retire. But unexpected disabilities like injuries or illnesses can throw a wrench in those plans.

Currently, an estimated 1 billion people across the globe are living with a disability, and due to the rise in chronic health conditions and an aging population, this number is only expected to increase. The World Health Organization states that anyone is likely to experience some form of temporary or permanent disability in their lifetime, but many of us don’t have adequate protection for our income in the event it happens to us.

Much like life insurance provides a safety net for your loved ones after you pass, disability insurance offers financial protection for a lost paycheck while you’re unable to work. Specifically, disability insurance provides you with a percentage of your income if an illness or injury ever prevents you from working.

To learn more about what disability insurance is, keep reading this guide to find out how it works, what it covers and whether it’s worth it for you. If you’re currently living with a disability and preparing to apply for financial support, jump down to our printable checklists that will help you prepare for a disability insurance application and interview.

Table of contents

• Disability insurance definition
• How does disability insurance work?
• What does disability insurance cover?
• Types of disability insurance
• Disability application checklist
• Who needs disability insurance?
• When should you get disability insurance?
• How do you get disability insurance?
• Disability insurance vs. life insurance: Do you need both?
• Pros and cons of disability insurance
• Is disability insurance worth it?

Disability insurance definition

Disability insurance is a form of protection for your monthly income. If you ever get injured or experience an illness that prevents you from working, disability insurance will provide a portion of your income for a certain period. This type of coverage offers a form of financial security, so that even if a disabling event disrupts your ability to work, you’ll be able to provide for yourself and any dependents.

How does disability insurance work?

Like any insurance policy, disability insurance is a contract made between an insurance company and the policyholder to exchange monthly payments for a benefit. In this instance, you’ll receive the benefit as a percentage of the monthly income lost if you suddenly find yourself unable to work.

Your policy will clearly outline how much your monthly payment will be to retain coverage, how much you’ll receive in benefits and how long the benefit will last. Typically, a policy will pay 40% to 80% of what your income was before experiencing the disabling event. Depending on the type of policy you choose, your benefit may last months or years.

What does disability insurance cover?

Typically, an injury or illness that restricts your ability to perform your job responsibilities is covered by disability insurance. Disabilities can contribute to financial burdens if they affect your ability to bring home a paycheck.

A disability is generally defined as any physical or mental condition that makes it more difficult for someone to interact with the world around them or perform certain activities. Take a look at the following examples to see what medical illnesses and conditions may count as a disability with insurance providers.

• Arthritis
• Back pain
• Cancer
• Carpal tunnel syndrome
• Depression
• Diabetes
• Heart disease
• Multiple sclerosis
• Muscular dystrophy
• Stroke

Additionally, injuries like the ones listed below may also count as disabilities.

• Fractures
• Loss of limb(s)
• Muscle strains
• Sprains
• Spinal injuries
• Traumatic brain injuries

Generally, disability insurance policies will provide the insured person a definition of disability as used in their contract. There are two types of definitions: any profession and own profession.

Any profession
Certain policies apply only to disabilities that prevent you from doing any profession, meaning they won’t pay out a monthly benefit if you can work and earn income in any job, even one different from the one you had.

Own profession
Other policies may pay out the monthly benefit even if you can perform other income-earning work, as long as your injury or illness prevents you from doing your own profession.

Types of disability insurance

To understand your options for coverage, it’s important to learn about the various types of disability insurance.

Long-term disability insurance

Like the name suggests, long-term disability insurance offers coverage for those who are unable to work due to a disability for an extended period of time. This time period may be several months, years or even the rest of your life.

The benefit period, or period of time that you’re paid a portion of your income, for long-term disability insurance may have a maximum limit. For example, some policies will pay benefits out for a total of ten years, but others may pay until a certain age.

A long-term disability insurance policy typically pays a higher percentage of your income — anywhere between 60% and 80%. Although it offers a much better monthly benefit, long-term policies are also more expensive than short-term ones.

Short-term disability insurance

Short-term disability insurance provides coverage for individuals who can’t work due to a temporary injury or illness. It replaces a lower percentage of your pre-disability income, usually between 40% and 60%. In contrast to long-term disability insurance, the benefit period of short-term insurance only ranges from a few months to two years at most.

You can typically get short-term disability insurance for free through an employer. Although it’s possible to purchase your own short-term disability policy, it may be better for you to explore other options for a financial safety net. Because the benefits of a short-term policy may not outweigh the price of your premiums, saving your money in an emergency fund or dedicated savings account may be the better option.

Social Security Disability Insurance

Through the Social Security Administration, you can also get Social Security Disability Insurance (SSDI). Compared to other disability insurance types, however, not everyone is eligible for SSDI, which has strict requirements.

To qualify for SSDI, you must meet the following criteria:

Have worked in professions covered by Social Security recently and for a certain amount of time
Have a medical condition that aligns with Social Security’s definition of a disability

Social Security’s definition of disability requires the following:

• You must not earn more than $1,350 a month in 2022 (limit is $2,260 for those who are blind).
• Your condition must be severe enough that you aren’t able to perform basic work responsibilities for at least one year.
• You must have a qualified medical condition found on this list or a condition determined to be as severe as the listed conditions.
• You aren’t able to perform any other type of work.

If you do meet the criteria to apply for SSDI, use our printable checklist to help you prepare for your disability insurance application and interview.

State disability insurance

Some states also legally require employers to provide disability insurance for any illnesses or injuries that occur outside of the workplace. This option for disability coverage is limited due to the varying requirements by state.

States and territories that offer disability coverage:

• California
• Hawaii
• New Jersey
• New York
• Puerto Rico
• Rhode Island

Who needs disability insurance?

Anyone who depends on a job to earn income can benefit from disability insurance. Whether you’re a fitness instructor healing from a broken leg or a lawyer who suffered a stroke, disability insurance provides you with a source of income so you don’t have to dig into your savings or go into debt paying for living expenses as you recover.

When should you get disability insurance?

If you want to make sure your income will be insured when you need it most, it’s best to get disability insurance when you’re young and healthy. This way you’ll be covered if a disabling event should ever happen to you.

How do you get disability insurance?

You can apply for disability insurance through your employer, through the government or a private insurance company. Choose what type of insurance you’d like to apply for to determine who to apply with.

After applying to your desired organization, you’ll have to complete a phone interview and medical exam. Next, you’ll go through an underwriting process to determine your coverage and how much you’ll pay in premiums.

The underwriting process may take anywhere between four to six weeks. Once it’s done, you’ll be sent a policy to sign. You’ll gain coverage by signing the policy and making your first premium payment.

Disability insurance vs. life insurance: Do you need both?

If you wish to protect your income and also have dependents that rely on that income, it’s important to have disability insurance and life insurance. Although you may be healthy and able to work now, a disability insurance policy ensures that your livelihood is protected in case an accident or unexpected health issue puts you out of commission for a certain period of time. It helps you support yourself and any dependents until you’re able to go back to work.

Life insurance offers a monetary benefit to your beneficiaries after you pass. This benefit provides a financial safety net in case you have a family to provide for or any form of debt that may financially burden your loved ones after you’re gone. By purchasing disability insurance and life insurance while you’re young and healthy, you can take care of your and your loved ones’ financial futures in case of the unexpected.

To cover all your bases, it’s also helpful to purchase a waiver of premium rider with your life insurance policy. This rider will allow you to waive payment of your life insurance premiums in case an illness or injury limits you from working and reduces some of the expenses that you may have while living off a monthly disability benefit.

Pros and cons of disability insurance

If you’re deciding whether or not you need disability insurance, we’ve outlined the major pros and cons to help you weigh your options.

Pros of disability insurance

• Provides protection for your income: If you’re ever unable to work because of a temporary or permanent disability, you’d lose your source of income. Disability insurance pays part of your income if this happens.
• Reduces the burden of financial obligations: Monthly benefit payments from disability insurance help you pay bills, buy food, cover home repair expenses and provide for yourself.
• Helps avoid financial ruin: Without benefit payments, many people go into debt or deplete their savings to stay afloat. Having disability insurance helps avoid this.
• Prioritizes time for recovery from a disabling event: The stress and worry of financial burden can hinder your recovery. With disability coverage, you can focus on healing and get back to work when your doctor says you’re ready.

Cons of disability insurance

• Costs may be unaffordable: Disability insurance policies are generally 1% to 4% of a person’s income, and not everyone can afford the extra expense.
• Can require a medical exam: Some insurance companies will require a physical exam before you can obtain a policy. This exam may affect your ability to get coverage.
• Has a waiting period: Many disability insurance policies have a waiting or elimination period, which is a designated time between the start of your disability and the time that benefits are paid. During this period, you aren’t paid any benefits, and the waiting period depends on the type of policy you have.

Is disability insurance worth it?

One in four Americans live with some type of disability. Disability insurance is a way to safeguard your future income and provide financial protection for you and your dependents. Use the following questions to determine if it’s worth it for you.

• Do you have an emergency fund to support yourself in case you’re suddenly unable to work? If so, how long will it last you?
• Does your employer provide you with disability coverage?
• Do you qualify for government benefits and will they be enough to support you?

If you answered no to a majority of these questions, it’s worthwhile to consider getting a disability insurance policy to insure your livelihood. Use the printable below to gather information you may need to apply for disability insurance online.

Every single person has a chance of experiencing a disability in their lifetime. Consider protecting your paycheck with disability insurance in case it happens to you. Don’t forget to pair your disability coverage with a life insurance policy so that you also protect any loved ones that depend on you financially.