Most Americans need to work a steady job in order to make money and support their families. If you’re able-bodied, it’s easy to take advantage of the fact that you can commute to work, perform your job duties, and collect a paycheck at the end of the month.
But what happens if an unexpected injury or illness prevents you from working? Well, it would probably have a pretty big impact on your financial situation.
Fortunately, having disability insurance can keep you financially afloat until you’re able to work again.
In this guide, I’m going to explain everything you need to know about disability insurance, including who needs it, what it covers, how much it costs, and where you can get it.
What is disability insurance?
The definition of disability insurance is pretty straightforward. It’s a type of insurance policy that replaces a percentage of your income if you become sick or injured and are unable to work. Disability insurance is sometimes called “income protection” because that’s its main purpose.
Another thing to know about disability insurance is that it’s not a one-size-fits-all policy. There are several types of disability insurance, and it also comes in two forms:
- Partial coverage.
- Total disability coverage.
These coverage options provide varying benefit amounts (coverage limits) depending on the extent of your disability.
Short-term disability insurance
Short-term disability insurance, as the name states, provides benefits if you are sick or injured and are only expected to be out of work temporarily. This is a policy that is offered through your employer, and a lot of times, it’s totally free to you!
Most policies will replace between 40%-60% of your income, but every short-term disability insurance policy is a little different.
It usually provides benefits for several months and sometimes up to a year or two. Another thing to know about short-term disability insurance is that there is often a waiting period of up to two weeks before you can start receiving benefits.
Long-term disability insurance
Long-term disability insurance is the opposite of short-term. It’s designed to provide income replacement if you become disabled and are unable to work for an extended period of time.
Some long-term disability policies will provide benefits for the rest of your life if the disability is serious enough that you may never be able to work again.
One of the other differences between long-term and short-term disability insurance is that long-term policies offer a higher percentage of income replacement, usually between 60% and 80%.
That said, it’s also more expensive than short-term disability insurance. Many employers offer long-term disability insurance, but you can also get a private plan.
State disability insurance
Depending on where you live, you might be able to take advantage of state disability insurance. Currently, the only states that offer their own disability benefits are:
- New Jersey.
- New York.
- Rhode Island.
To qualify, you have to meet certain criteria.
In every state, disability coverage is available for 26 weeks, with the exception of Rhode Island, which offers benefits for 30 weeks, and California, which offers benefits for 52 weeks.
In California and New Jersey, you can also use state disability benefits for paid family leave. If you want to rely on your state’s disability insurance, make sure you know what’s covered and if you qualify first.
Own-occupation vs. any-occupation disability insurance
While we’re talking about the types of disability insurance, there’s one more thing I want to explain the difference between own-occupation and any-occupation coverage. You’ll be able to choose what type of coverage you want when you buy disability insurance.
Here is the difference:
- Any-occupation. An any-occupation policy will only provide benefits if you are unable to work in any capacity. If you are physically able to work a different job, even if it’s lower-paying, your disability insurance won’t apply.
- Own-occupation. With an own-occupation policy, the fine print in your insurance agreement says that if you are unable to perform your current job duties, you’re allowed to collect benefits, even if you could theoretically do another job.
So, for instance, let’s say that you’re a factory worker and you are unable to work due to severe arthritis in your knees. With an any-occupation policy, you wouldn’t be able to use your disability benefits because you could potentially get a less physical job, such as data entry.
However, if you had an own-occupation policy, you would be allowed to collect benefits in this situation. Your policy states that the benefits will kick in if you are not able to do your current job, regardless of your abilities to do something else.
What disability insurance covers
Disability insurance is pretty comprehensive, but every insurance company has its own definition of “disability.” I was surprised to learn what is and isn’t covered.
As a general rule, disability insurance will cover physical injuries or illnesses that develop suddenly or unexpectedly.
Here are some ailments that are often covered:
- Heart attack.
- Cancer (late-stage).
- Certain mental health illnesses.
- Heart disease.
- Musculoskeletal issues.
- Pregnancy complications.
- Postpartum recovery.
- Chronic pain.
- Broken bones.
- Joint disorders.
Something you might notice is that, besides injuries, most of these conditions are not tied to the workplace. Surprisingly, data shows that about 90% of long-term disabilities are caused by illnesses, like arthritis. A much smaller percentage of people get sick or injured while performing job-related duties.
Nevertheless, there are lots of medical conditions that can make it challenging or even impossible to work. Some are chronic, while others are short-term, like recovering from childbirth.
Contrary to popular belief, there are some types of disability insurance that will offer protection for the rest of your life if a doctor certifies that you can never work again.
What disability insurance doesn’t cover
Now that you know what disability insurance covers, let’s talk about what it doesn’t cover.
It usually excludes coverage for disabilities that most people think about when they hear the word “disability.” Some examples of disabilities that are not covered by insurance include:
- Intellectual disabilities.
- Autism spectrum disorder.
- Self-inflicted injuries.
- Fighting in a war.
I also want to mention that your age could make it difficult to get private disability insurance.
Some insurance companies cap disability benefits around the age of retirement, so if you’re over 65, you may not be able to use your benefits.
You can, however, apply for Social Security disability benefits if you are unable to fully retire.
How does disability insurance work?
It can be confusing to understand how disability insurance works, so let me break it down.
Like any type of insurance, disability insurance has a premium, which is the monthly cost of keeping your policy in force. Usually, there is no deductible required, which is a big plus.
If you get sick or injured and are unable to work, you’ll file a claim with your insurance company in order to receive your benefits. Most disability insurance policies will only provide benefits in regular intervals, meaning you can’t get the benefits in one lump sum.
Here’s a step-by-step guide to filing a disability insurance claim:
- Contact your insurance company. When you contact your insurance company to file a claim, you’ll need to detail what type of injury or illness you’re dealing with, how it happened, where it happened, when it happened, and what type of treatment you’ve received.
- Complete the claim paperwork. The claim handler that is assigned to your case will probably provide a big packet of information to fill out. You may be asked to provide a written statement from your physician explaining the extent of the disability and for how long you will be unable to work. If the injury or illness occurred in your place of work, you’ll need to provide a written letter from your employer, as well.
- Get your benefits. Once your claim is approved, the insurance company will let you know how much income replacement you qualify for and how long you’ll receive the payments. You’ll continue getting payments at regular intervals until you have recovered from the disability, or when your covered period ends.
Riders help you personalize your policy
I also want to note that some disability insurance providers offer riders, which are optional coverages you can purchase for an additional fee.
Riders fill gaps in your basic coverage and provide protection in specific circumstances.
Some of the most common disability insurance riders include:
- Student loan rider. This provides an extra benefit if you become disabled while paying off student loans.
- Cost of living rider. This offers increased benefits based on the cost of living in your area.
- Future increase rider. This allows you to purchase more coverage as your income increases, without taking another medical exam.
Who needs disability insurance?
You don’t need to work in a high-risk job to benefit from disability insurance. The truth is, anyone who relies on a regular paycheck to financially support themselves and their loved ones should consider investing in disability insurance if you don’t have coverage through your employer.
Those at risk of illness or medical issues
Illnesses and medical issues are often unexpected, which doesn’t give you any time to save up or prepare to be out of work for an extended period of time.
Without disability insurance, there’s no way to bolster your income, which can put you in a hard financial situation, especially if you’re racking up medical bills.
Those who make the majority of their families income
If you are the main breadwinner in your family, disability insurance is probably for you. If you are unable to work, it can make a huge difference in your ability to continue to support your family financially.
Those who work for themselves
On the same note, if you work for yourself, having disability insurance is key because you can’t take advantage of paid sick leave from an employer.
The cost of disability insurance
At this point, I’ve covered the most important basics of disability insurance, so now let’s talk about cost.
Disability insurance premiums are personalized, meaning they are different for every insured individual.
It’s difficult to say exactly how much the average premium is, but some insurance companies estimate that it’s typically between 1% to 4% of your annual income.
When you apply for disability insurance, the insurance company will look at these factors to determine your rate:
- Occupation. If you work in a high-risk field, or if there is a history of workers in your field filing disability insurance claims, you’re going to pay a higher rate.
- Age. Older people typically pay higher disability insurance premiums than young people.
- Overall health. If you already suffer from pre-existing conditions or poor health when you apply for disability insurance, you will pay a much higher rate.
- Smoking status. Smokers pay higher insurance rates because of the increased health risks associated with nicotine use.
- Location. Disability insurance premiums can vary based on where you live.
- Benefit amount. The higher your policy’s benefit amount, the more you’ll pay for coverage.
- Benefit period. Choosing a policy with a longer benefit will lead to a higher premium.
- Type of policy. Own-occupation disability insurance premiums tend to be higher than any-occupation policies.
Before your policy can be approved, you will probably have to take a medical exam, as you do for some life insurance policies. The exam is just like any physical checkup, where a physician will make a note of things like:
- Blood pressure.
- Family history of disease.
- Blood and/or urine sample results.
Ultimately, the younger and healthier you are, the less your disability insurance premium will be.
People who are older or have a history of past or pre-existing health issues pay more because their risk of needing disability benefits is much higher.
Where to get disability insurance
Private disability insurance is pretty easy to find. Just keep in mind that every company offers different plans with varying benefit amounts.
Plus, not all companies cover the same disabilities. Before you choose a company, it’s worth doing your own research to find the best provider based on the type and amount of coverage you want.
Try an insurance marketplace to get the best rates
Fortunately, there are lots of insurance companies on the market that offer disability insurance. I always recommend using an insurance marketplace first, like Policygenius, which makes it easy to compare quotes from a few different insurance carriers using just one application.
Or go with a company that specializes in disability insurance
Another option is to get a policy from a company that specializes in disability insurance, like Breeze. I think Breeze has one of the easiest online applications, plus it has tons of online resources, which can be helpful if you still have questions about disability coverage.
Disability insurance can be complex and there are many nuances that are important to understand. But my biggest takeaway is this—anyone can benefit from disability insurance, even if you’re healthy and work in a low-risk job environment.
If you’ve ever suffered from a serious injury or illness, you know how difficult the recovery process can be. If you want peace of mind knowing that you won’t lose all of your income in the event of a disability, it’s worth investing in disability insurance.