Disability insurance is meant to replace part of your income in case you cannot work due to sickness or injury. It is a form of financial protection for your livelihood, which is your most valuable asset.
This article will take a detailed look at what disability insurance is and how it works.
What is Disability Insurance?
In simple terms, disability insurance is protection for your income. It is also called disability income insurance, income protection insurance or DI short.
It is a financial safety net in case you get too sick or hurt to work any longer. Disability insurance provides you and your loved ones the financial security needed in case you cannot work. The benefits of disability insurance can be used however you want.
For instance, you can use disability insurance benefits to pay your monthly bills and out-of-pocket expenses for basic necessities, such as groceries and childcare.
How Does Disability Insurance Work?
Think of disability insurance as an agreement between insurance companies and the policyholders. In exchange for monthly payments (premiums) you make, the insurance provider agrees to pay you a monthly amount as a benefit if you suffer a disability that prevents you from holding a conventional job.
Disability insurance is aimed as a replacement for a portion of the income you lose due to being unable to work any longer. When you have disability insurance, you can easily meet your financial needs, such as covering household expenses, paying bills, providing for the family and handling medical expenses.
A disability insurance policy will usually detail the following fundamental elements of coverage:
Monthly premium amount – Similar to other insurance policies, this is the payment you need to make every month to keep your coverage active.
Definition of disability – Some insurance policies will pay monthly if an injury prohibits you from earning a paycheck. This is also applicable if you can do other types of work but with significantly reduced income.
Amount of benefits – Usually, the insurance benefit amount is a percentage of your income. Insurance providers generally tend to pay 60% to 80% of your previous income as your monthly payment benefit.
Duration of disability benefits – The disability insurance policy differs for different circumstances and may offer coverage for a few months to a few years and even up to a certain age.
Now that you know the basics of disability insurance let’s look at the different types of disabilities covered under it.
What Does Disability Insurance Cover?
Disability insurance offers coverage in case of illnesses or injuries that restrict your ability to work at a conventional job. Despite having such a simple definition, many people still have misconceptions about what is classified as a disability and what isn’t.
Usually, when we hear the word “disability,” we automatically imagine someone who has suffered a freak accident or a rare birth defect. However, the majority of causes of disabilities are more common.
For instance, back pain, arthritis, cancer, diabetes, depression, stroke and heart disease make up around 90% of all claims filed for disability insurance, as opposed to only 10% for physical injuries.
Still, injuries such as fractures, strains of muscles, and sprains of ligaments are also classified under disability. This proves that the scope of disabilities that can prevent someone from earning a normal livelihood due to a disability is a lot broader than most believe.
What Are the Types of Disability Insurance?
Though there is a multitude of types of disability insurance policies that exist, we’ve narrowed down the list to the top 4 types of disability insurance you can buy in 2023:
1 – Long Term Disability Insurance
Long-term disability insurance provides income protection to those affected by disabilities for an extensive period. It offers to cover monthly payments to people who suffer from the effects of serious injuries and illnesses.
This is for the injury or illness that prevents the person from working at a meaningful job for several months or years, even permanently.
The benefits of long-term disability insurance cease once the person has recovered from the disability, within a maximum benefit period. This period can be as short as several years and a maximum of 10 years. Besides this, you can also purchase disability insurance policies that benefit up to 65 years of age.
Long-term disability insurance can be bought through a group plan or an individual insurance policy. Though a long-term insurance policy is slightly more expensive than short-term disability insurance, the former offers more extensive benefits.
Under long-term disability, you can get coverage for around 60% to 80% of your income. You can even buy long-term disability insurance policies that replace your entire income, which you lose when you are forced to work a lower-paying job due to an illness or injury.
2 – Short Term Disability Insurance
Short-term disability insurance is meant for those suffering a temporary disability due to illness or injury. This type of disability insurance is normally provided through an employer group insurance plan.
Though you can buy individual short-term disability insurance policies through your employer, financial experts do not recommend it. The reason behind this is that the cost of premiums in this circumstance may only sometimes be worth the amount you receive as benefits.
If you cannot secure short-term disability coverage from your employer, then you can establish an emergency fund.
Short-term disability insurance usually pays around 40% to 60% of your pre-disability income and its benefits last from 3 to 6 months. However, some policies can provide benefits for up to 2 years. The benefits of short-term disability insurance begin 14 days from the date of the disability.
3 – Social Security Disability Insurance (SSDI)
Social security disability insurance (SSDI) is a government-backed initiative administered by the Social Security Administration. Like the other types of disability insurance policies, SSDI benefits are applicable if a disability prevents you from holding a meaningful job.
However, it is most difficult to qualify for SSDI benefits, as the eligibility criteria include the following:
- Having worked in jobs covered by Social Security
- Having worked long enough and recently under Social Security
- Having a medical condition that meets Social Security’s definition of disability
- Inability to work for a year or more because of a disability
Generally, a person is not considered eligible for SSDI benefits if they work and earn over US$ 1,220 per month. However, if you are unemployed, Social Security will consider if you can work and earn a livelihood.
If you are found to be able to work at any kind of gainful job, you will not be considered eligible to receive SSDI benefits. When making this decision, the Social Security Administration will consider your medical condition, past work experience, education, age, and transferable skills.
4 – State Disability Insurance
If you live and work in California, New Jersey, Hawaii, Rhode Island or New York, then you may be covered under state disability insurance. These states dictate that employers offer disability insurance coverage to employees for illnesses and injuries outside the workplace.
However, similar to SSDI, state disability insurance has several drawbacks that make it not feasible for most disabled persons.
If you rely on your source of income, then you are more likely to need disability insurance cover, especially if you have multiple dependents. Disability insurance is considered a smart investment for those who seek a secure financial future.
I am a dedicated healthcare researcher and an enthusiast specializing in medical grants, medical education and research. Through my articles, I aim to empower healthcare professionals and researchers with valuable insights and resources to navigate these critical aspects effectively.