What is disability insurance?

Definition of Disability Insurance

Disability insurance, or income disability insurance, provides partial benefits to compensate for income for qualified workers who are unable to work due to an injury or illness that is not work-related, or in some cases, pregnancy. Employees can obtain this type of insurance through their employer, or by purchasing a policy themselves, or through a government agency, or the Social Security Administration.

How Disability Insurance Works

Disability insurance provides benefits to compensate for lost income when you are unable to work due to injury, illness, or both, or due to pregnancy. To qualify for benefits, you must meet the definition of disability as specified in the policy.

Disability insurance will not replace more than 100% of your pre-disability income, and often replaces a lesser amount. The methods for calculating disability income benefits vary depending on the type of income benefit you have and whether the benefits are provided by a government program, a private insurance company, or the Social Security Administration. However, there are two methods:

1. Income Benefit Formula: The income benefit formula expresses the total amount of the benefit you will receive as a percentage of your pre-disability wage and may also take into account income you receive from workers’ compensation or Social Security benefits. This percentage varies from policy to policy but may typically be in the range of 50-75%.

2. Fixed Amount: The benefit amount you will receive may be a predetermined fixed amount specified in the policy, usually set when purchasing the insurance policy. You will receive this amount regardless of whether you receive other benefits during the disability period.

Benefits do not begin immediately after you become disabled. Insurance policy contracts have a waiting period – a specified time period after your disability begins during which benefits are not payable. The waiting period varies between contracts, ranging from several days to a year or more. You can choose a waiting period when purchasing your policy; a longer waiting period lowers premium costs.

Note: Disability insurance benefits often depend on the income of the insured person. Your disability benefit may decrease after purchasing coverage if your salary decreases.

Review your policy details to understand your rights and obligations, as well as what is covered and what is not covered in the insurance. It is common for disability insurance to exclude the following conditions:

• Claims related to pre-existing conditions
• Injuries or illnesses resulting from war
• Self-inflicted injuries
• Injuries or illnesses caused by alcohol or drug dependence
• Work-related injuries

Types of Disability Insurance

If you cannot work due to injury or illness, these types of disability insurance will pay a portion of your income:

Short-Term Disability Insurance

Short-term disability insurance replaces a certain percentage of your pre-disability income after a short waiting period, like two weeks. The benefit payout period varies from policy to policy, but the maximum length of time is typically six months.

Short-term disability insurance can be costly when purchased individually, but group coverage is usually cheaper. Employers may provide short-term coverage for their employees as a company-paid benefit. The waiting period for short-term disability insurance can bridge the gap before long-term disability benefits begin if you have and need both.

Long-Term Disability Insurance

Long-term disability insurance is considered protection typically against catastrophic illness or injury. Benefit payments may last anywhere from five years to retirement or for the rest of your life, depending on your policy. You can expect to pay higher premiums if your policy carries a longer benefit period.

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Short-term and long-term disability insurance policies contain these protective features:

• Non-cancelable: The disability insurance policy will remain in effect as long as you pay your premiums, which are guaranteed not to increase. Benefits also cannot be changed.
• Guaranteed renewal: This type of policy is similar to the non-cancelable policy, except that premiums can be increased for an entire class of policyholders.

How to Get Disability Insurance

Employer-Sponsored Coverage

Employer-sponsored coverage is the primary source of income protection from disability in the United States and is often in the form of group short-term or long-term plans. Coverage may be automatic, meaning no medical underwriting or examination is required. Employees are often given the option to increase the basic coverage provided by the employer.

Some companies may not offer disability coverage but allow their employees to purchase coverage on a voluntary basis. It may be easier to qualify for employer-sponsored coverage, but you should check with your human resources department to learn about the coverage and purchasing options available.

Insurance Companies

Private insurance companies offer a variety of individual disability insurance options. Qualifying for coverage may require a medical exam and premiums may be higher than those available through an employer. However, these policies are portable, so there is no need to worry about losing coverage when changing jobs.

Government Disability Insurance Programs

The states of California, Hawaii, New York, New Jersey, and Rhode Island, as well as the territory of Puerto Rico, provide a partial wage replacement insurance plan – typically for up to six months – that all eligible workers must pay for through payroll deductions.

This can be an important source of income replacement for the short term for residents of these states.

Social Security

Government insurance programs cover many workers, but not all qualify for benefits – about 64% of applicants are initially denied. Disability benefits are for long-term disabilities, not short-term disabilities, and may be available if you have a condition expected to last for at least a year or lead to death. The benefit amount is generally determined based on your work history, income, and age. In 2021, the average monthly benefit received was $1,421.68.

The Bottom Line

Disability insurance protects your earned income from the risk of being unable to work – and thus earn – due to a disability. Coverage is available on a short-term and/or long-term disability basis. Long-term and short-term disability insurance policies include waiting periods after you become ill or injured before benefits are paid. Your disability insurance policy will determine how long you will receive monthly benefits. Alternative income sources such as workers’ compensation and Social Security benefits may reduce the amount you will receive as income replacement.

Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and high-quality.

Source: Guardian. “What Does Disability Insurance Cover?” Accessed Aug. 4, 2021.

North Carolina Department of Insurance. “A Consumer’s Guide to Disability Income Insurance.” Accessed Aug. 4, 2021.

Guardian. “Income Protection: The Role of Disability Insurance in Financial Wellness.” Page 5. Accessed August 4, 2021.

Employment Development Department, State of California. “Disability Insurance and Paid Family Leave Benefits.” Accessed Aug. 4, 2021.

State of Hawaii, Disability Compensation Division. “About Temporary Disability Insurance.” Accessed Aug. 4, 2021.

Department

of Labor and Training, Rhode Island. “Temporary Disability Insurance.” Accessed Aug. 4, 2021.

Social Security Administration. “Non-Occupational Disability Insurance (SINOT).” Accessed Aug. 4, 2021.

New York Workers’ Compensation Board. “Better for Workers, Better for Business.” See Page 4. Accessed Aug. 4, 2021.

Department of Labor and Workforce Development, New Jersey. “Temporary Disability Insurance.” See “About the Program.” Accessed Aug. 4, 2021.

Social Security Administration. “Disability Benefits.” Accessed Aug. 4, 2021.

Social Security Administration. “Old-Age, Survivors, and Disability Insurance.”

Source: https://www.thebalancemoney.com/what-is-disability-insurance-5195965