Disability Insurance (Why You Need It & How to Get It)

It’s always smart to prepare for the worst. But, unfortunately, many Americans don’t account for emergencies. This is illustrated by the fact that roughly 40% of Americans have reported that they wouldn’t be able to pay an unexpected $400 bill without having to take out a loan or sell something of value. Even fewer would be able to support themselves for months if they fell sick or got injured and were unable to work. 

So what would you do if a sudden ailment prevented you from working? Taking out a disability insurance policy is one way to maintain your financial security in case of illness or injury. In this article, we’ll take an in-depth look at what disability insurance is, why you may need it, the types of disability insurance, how it works, and how to get it. Let’s start off by going over the definition of disability insurance. 

What is Disability Insurance?

Disability insurance, also known as disability income insurance or income protection, is a form of coverage that financially supports you in the event that you suffer from an illness or injury that prevents you from being able to work. It pays out a percentage of your regular income so that you can continue to provide for yourself while out of work. 

This type of insurance acts as a sort of safety net in case you’re unable to work and earn a living. Disability insurance for single people is a good move, but it’s especially important that you take out a policy if you have a family or significant other who depends on your income to purchase basic necessities, such as food and housing. 

Why Do You Need Disability Insurance? 

You never know when an injury or illness will suddenly strike. If you’re young and in good health then it may just seem like an unnecessary expense, but it’s really not all that unlikely that you’ll experience an injury or illness at some point in your life that may put you out of work temporarily or permanently. In fact, more than 25% of today’s 20-year-olds will become disabled before reaching the age of 67. 

What would you do in case you injured your back and were unable to get up out of bed? What if you were diagnosed with cancer or suffered an acute stroke? If any of these things were to happen and you didn’t have a safety net, such as disability insurance, you’d have little or nothing to fall back on—you’d be out of an income and forced to fend for yourself, which is never a good position to be in. 

Disability insurance provides you with a sense of security and peace of mind, since you know that if anything were to happen you would be taken care of. You could recover without the added stress of worrying about finances, and you wouldn’t have to rush back to work before you were ready due to financial pressures, which could increase the chances of your injury or illness becoming re-agitated. 

Types of Disability Insurance

Short- and long-term disability insurance are the two main types of insurance available to workers. Each has its own set of advantages and disadvantages and, when you take a number of factors into account such as your health, occupation, and finances, one may be more well-suited for you than the other. Here, we’ll go over the primary distinctions between the two. 

Short-Term Disability Insurance

Short-term disability insurance pays out if you are unable to work for a relatively short period of time, typically three months to a year. In most cases, this type of insurance replaces 60-70% of your base salary. Some of the most common reasons for claiming short-term disability insurance include: 

• Pregnancy (some policies may provide benefits during unpaid parental leave) 
• Musculoskeletal disorders, such as injuries to muscles, nerves, tendons, or joints 
• Digestive conditions
• Short-term mental health problems
• Fractures, sprains, and pulled muscles 

Long-Term Disability Insurance 

Long-term disability insurance comes in handy if you suffer from an injury or illness that puts you out of commission and leaves you unable to work for long periods of time. How long and how much this type of insurance pays out depends on the policy you get. 

Long-term disability insurance will most often replace 40-60% of your base salary until you’re able to return to work, get to retirement age, or reach a time- or money-dependent threshold. For instance, some policies will place a cap on the number of years that you’re eligible to continue receiving payments, or establish a maximum dollar amount that they’ll pay out over the life of the policy. 

Some of the most common reasons for claiming long-term disability insurance include: 

• Severe musculoskeletal disorders like arthritis 
• Pregnancy
• Cancer 
• Serious physical injuries
• Persistent mental health problems

There are some other important differences between the two policies to note as well. While both short- and long-term policies include an elimination period, or a certain amount of time that a worker must be disabled for before they begin to pay out, the length of this period differs based on the type of policy you get.

Short-term disability insurance policies generally have a brief elimination period. It may take around two weeks after you’ve been disabled to start receiving payments. In contrast, long-term disability payments typically have a lengthier elimination period. In the case of a long-term disability claim, it could take as long as six months after you’ve been disabled before you start receiving payments. Keep in mind that with either policy, you won’t be eligible to receive any benefits if you’re able to work again before the elimination period has passed. 

Aside from short- and long-term disability insurance policies, there are a few other routes you could go in case you become unable to work. To find out more about other benefits and insurance policies you may qualify for, especially if you’re a veteran, visit usa.gov. 

To use one example, the Social Security Administration (SSA) provides disability insurance for eligible workers in some cases. However, in order to qualify for social security benefits you have to meet a strict set of requirements, some of which include:

• Meeting the SSA’s definition of disabled 
• A history of working in occupations covered by the SSA
• The inability to work for at least a year due to your disability 
• A disability that severely impacts your ability to move and/or function

Social Security Disability Insurance (SSDI) can be incredibly hard to actually secure—between 2006 and 2015, only 34% of the total claims were approved, and it can take up to five months to receive a decision after you apply for SSDI. 

Like with any major life or financial decision, it’s a good idea to compare the various disability insurance policies and providers that are available to you. 

How Disability Insurance Works 

The details of how disability insurance works varies based on the type of coverage you go with. Different policies have different benefit periods, elimination periods, and definitions of disability. The policy’s definition of what a disability entails is especially important, as this has a significant impact on whether or not a potential claim will be approved.  

Some policies pay out when you can’t work a job you’re qualified for, others pay out if you can’t perform a specific job in your occupation, and others only pay if you can’t perform any work at all. Some policies even cover partial disability, meaning they supplement your salary if you can only work part-time due to your disability. 

As far as defining a disability, there are two main options when it comes to coverage: own- and any-occupation disability insurance. 

Own-occupation disability insurance is a policy where an employee is considered disabled if they are unable to fulfill the duties of their own regular occupation, meaning that you would still receive benefits even if you were able to take up another occupation or work in another industry. 

Any-occupation disability insurance is a policy where an employee is considered disabled if they are unable to work in any occupation. Since, compared to an own-occupation policy, this situation is less likely and the insurer has a lower chance of paying out, this kind of plan is generally less expensive (but also has stricter requirements when it comes to making a claim).

The application process for disability insurance generally takes a few months, and each insurance company has its own process for assessing applicants, determining their eligibility, and issuing rates for coverage. The likelihood of you becoming disabled can affect the kind of policy you’re eligible for and the rates you’ll pay. Some of the most common factors they take into account during this assessment process include: 

• Age: The cost of disability insurance rises as you age, since you become more likely to suffer an injury or illness. 
• Occupation: If you work at a job where there’s a high risk of injury, then you’ll likely end up paying a higher rate. Additionally, if a job is highly specialized or requires physical labor, you may end up paying an increased rate because it will likely take longer for you to return to work after an illness or injury.
• Health background: Insurers can also take into consideration chronic conditions, past health problems, family medical history, past or current tobacco/drug use, height and weight, and results from any medical exams they may require before issuing a policy. 
• Annual salary: Disability benefits are typically calculated as a percentage of salary, meaning that insurers will have to pay out more to those with a high income. Thus, high earners typically have to pay more for coverage. 

The process for filling out a claim depends on your insurance provider and the state you live in. If you live in California, for example, you would go to edd.ca.gov to learn more about disability insurance and get started on filing a claim. 

How to Get Disability Insurance 

There are a few ways to go about getting disability insurance. You can either apply for coverage through your employer, through a professional organization, or take out a policy on your own.

Employer-Sponsored Disability Insurance

Most people get disability insurance through their employer. That’s because it’s convenient, employers often help cover the cost, and premiums are often lower because you’re covered under a group plan. Additionally, employers are required by law to provide their employees with short-term disability insurance in the states of California, Hawaii, New Jersey, New York, and Rhode Island. 

Start by asking  if your employer has any coverage available, and whether it’s voluntary or if they cover some or all of the premiums. Even if they don’t cover the premiums for you, it’s likely to be less expensive buying it at the employer’s rate than the rate you would be charged as an individual. 

Professional Group Disability Insurance

A number of labor unions, professional associations, and trade organizations offer disability insurance to their members. Similar to employer-sponsored programs, these organizations take out group insurance plans that are typically easier for members to enroll in and have lower premiums when compared to individual plans.

Individual Disability Insurance Policies 

Individual disability insurance provides you with more certainty than a group plan, which can be lost if you leave the organization sponsoring it, or if they decide to discontinue benefits. When you opt to go with an individual disability insurance plan, you’ll have to shop around to find an insurance company that you like, and that’s also willing to provide you with coverage. 

The advantage of getting an individual disability insurance plan is that you’ll have the ability to customize it to fit your needs. The amount disability insurance pays out depends on your annual base salary—but, if you work in sales, for example, then you may heavily depend on commissions in order to maintain your lifestyle. In this case, you might consider taking out an individual disability insurance plan to account for that potential loss, or to supplement the insurance your employer already provides. 

Other advantages of an individual disability insurance plan include the fact that you’re still covered even if you leave your company and you can collect tax-free benefits if you become disabled, as opposed to an employer-sponsored plan, where you have to pay taxes on the benefits. 

The last thing you want if you fall sick or get injured is for financial pressures to intensify an already stressful situation. So don’t skimp when it comes to your health and well-being—protect yourself and your family by taking a look at options, including disability insurance policies, that will support you if anything were to happen. Use this guide as a starting point, and do your due diligence when shopping around to find the plan that’s right for you.