What does disability insurance cover?
Disability insurance will cover part of your salary if you become disabled. Those contributions end when you return to your job. Most policies pay 40% to 60% of your earnings, up to the policy's monthly benefit limit, for the period specified in the contract, provided you meet the eligibility requirements.
You can get disability insurance plans in three ways:
- Individual policies: You buy coverage directly from an insurance company.
- Group plans: You get coverage through an employer or professional organization.
- Employer-sponsored coverage: Your employer pays all or part of the premiums for a group disability plan.
When getting disability insurance quotes, check income caps and reimbursement limits. If you're a higher earner, you might exceed the cap. It's a smart idea to explore supplemental disability insurance to help provide extra funding if you become disabled.
A benefit of individual disability insurance is that you take it with you when you leave your job. That's not true of employer-based plans.
Group plans, including ones through professional organizations, are usually cheaper than individual policies, and you won't get denied for group coverage. With an individual plan, a disability insurance company reviews factors such as age, sex, occupation, and earning potential. However, since the group plan is connected to an organization or employer, you will lose it if you leave your job or organization.
Employers, especially large companies, may offer both short-term disability and long-term disability options. Short-term will pay you a percentage of your income for a few months. Long-term often pays 40 to 60% of your base salary for a longer time. Your employer may offer a chance to build on that coverage for more funding if you become disabled.
In addition to these plans, you may get help from the government through workers' compensation or a state disability insurance program, depending on how you became disabled. It's important to remember, though, that the vast majority of disability claims have nothing to do with on-the-job injuries. The National Safety Council estimates that 73% of long-term disabilities aren't work-related and don’t qualify for workers' compensation.
Types of disability insurance
Disability insurance comes in two main types: short-term and long-term policies. Short-term policies pay benefits for a limited period, while long-term policies provide income replacement for an extended period.
The two types of disability insurance are:
- Short-term disability insurance typically covers you for three to six months.
- Long-term disability insurance kicks in after the short-term period ends. Long-term disability usually lasts two, five, or 10 years or until the age of 65 or 67, depending on the policy.
If you buy your own policy, the insurance generally replaces 40 to 60% of your income. Employer policies typically pay about 60% of your income.
If you become disabled, a doctor will examine you and determine if your disability prevents you from working. You get paid once that determination is made in your favor.
Who needs disability insurance?
Anyone who depends on a paycheck to cover living expenses should consider disability insurance. An illness or injury that keeps you out of work reduces your income, even if your job doesn't involve physical labor.
Life Happens, a nonprofit consumer group, said you have a 30% chance of having an illness or injury that keeps you out of work for 90 days or longer. In most cases, the disability isn’t work-related, so you won’t be able to collect workers’ compensation.
Disability insurance can help you and ensure you make your regular payments, including your mortgage or rent.
How much does disability insurance cost?
Disability insurance premiums depend on your age, health, occupation, income and policy features. Individual policies often cost more than group coverage, although your actual premium depends on the benefits and terms you choose.
Insurers base individual rates on your age, sex, job, and salary potential:
- An individual policy may cost between 1 and 3% of your annual income.
- Group policies cost about 1%.
- Employer-sponsored plans are usually the most affordable, costing about 0.5%, but they are taxed.
Income also plays a role. Someone with a lower salary will pay less in premiums than someone with a higher salary. The insurer would pay out less if you have a lower income, so they charge lower premiums.
A healthy 25-year-old earning $30,000 a year might pay $20 to $25 a month for coverage. Meanwhile, a 55-year-old with health issues making $120,000 annually might pay $100 per month or more.
Also, an insurer may reject a person with major health problems or charge higher premiums.
Do I need more coverage if I have disability insurance through my job?
You need additional disability insurance if your employer's plan doesn't replace enough of your income to cover your expenses. Workplace plans often cap monthly benefits, and the stated benefit percentage might apply only to your base salary.
Also, the income amount from the at-work policy is usually capped. That amount may be less than 60% of your income if you’re a high earner. The 60% typically applies only to base salary. Bonuses and commissions usually don't factor into the equation, which can be a significant problem for employees who depend on those sources of income.
Group policies may have benefit caps, shorter benefit periods, or stricter definitions of disability compared to individual policies. Since about 90% of disability claims come from illness, it's important to verify your group plan covers illness-related disabilities adequately.
Also, you could lose your current at-work coverage if you change jobs. This could be a problem if your next job doesn't provide disability insurance.
Do I need an individual policy if I can get coverage through Social Security?
Consider an individual disability insurance policy if Social Security disability benefits won't cover your living expenses. SSDI has strict eligibility requirements, and benefits might not replace enough of your income to cover your bills. An individual policy provides additional income if an illness or injury prevents you from working.
How much disability insurance do I need?
You need enough disability insurance to cover your essential expenses and financial goals if you can no longer work. Start by calculating your monthly expenses, including your mortgage, regular bills, retirement savings, and your children's education costs. Then factor in your household income and any other disability benefits to determine the additional coverage you need.
Take into account:
- Regular income
- Mortgage
- Retirement
- Future living expenses
- Children's education expenses
One way to figure out how much you may need is to plug your information into the Life Happens calculator. The tool estimates what income you will need to maintain your standard of living if you become disabled.
Here’s what to do once you figure out how much you can get from disability insurance. Combine that amount with your partner's salary to see if you would have enough to survive and plan for the future in the event you become disabled and can't work.
If you find you won't have enough between your spouse and your disability plan, experts suggest you and your partner may want to purchase individual disability insurance policies.
When does my disability insurance start?
Disability insurance starts paying benefits after you complete the policy's elimination period. This waiting period begins when you become disabled and lasts 30, 60, or 90 days, although policies range from 30 days to one year. A shorter elimination period means faster payments but higher premiums. A longer period costs less but requires enough savings to cover expenses while you wait.
The benefit of a longer elimination period is that policies are cheaper. That might work for you if you have a large nest egg you can tap into before the elimination period ends. If you live paycheck to paycheck or don't have much in savings, you will likely want to pay a higher premium. That way, you know you'll have to wait a shorter time before the insurer starts paying you.
Disability insurance terms to know
Understanding key disability insurance terms helps you compare policies and choose coverage that fits your needs. Pay attention to how the policy defines disability, how long benefits last and which features affect your premiums and payments.
Let’s take a look at phrases and what they mean so that you can make the best decision:
- Partial or total disability coverage. You can go with a policy that only kicks in if you're totally disabled or one that allows you to collect a partial payment if you're partially disabled and can only work part-time.
- Elimination period. This is the length of time -- usually 30, 60 or 90 days -- you'll need to be out of work before collecting a payment. Be aware that a policy with a shorter elimination period costs more.
- Benefit period. This is how long you can collect benefits. You decide -- it could be for two years, five years, until age 65, until retirement age or for another period.
- Occupational class. The cost of coverage, in part, depends on your job. If you have a white-collar position, you'll likely pay less than a blue-collar worker who may face more risks on the job.
- Own occupation vs. any occupation. You can get coverage that takes effect if you can't perform your particular profession or a policy that covers you if you can't perform any occupation. Someone like a neurosurgeon might opt for coverage for their own profession. The coverage is more expensive. Coverage for "any occupation" means you can't perform any job for which you have the education and training.
- Inflation protection. A cost-of-living policy rider will increase benefits to keep pace with inflation if you become disabled. For instance,a 30-year-old who becomes permanently disabled and unable to work would see their benefits eroded by inflation by their 50s. This rider is recommended for younger people and typically adds 15 to 25% to the cost of a policy. If you're nearing retirement, experts say the extra cost probably isn't worth it.
- Waiver of premium. This feature allows you to avoid paying premiums while you are disabled and collecting benefits.
- Extra coverage for severe disability. In addition to paying a percentage of your salary, a policy with a catastrophic rider pays additional money if you're unable to perform two out of six "activities of daily living" or have a cognitive impairment. The six activities are eating, bathing, dressing, toileting, continence and transferring (such as moving from a wheelchair to bed). This rider tends to increase a policy's cost by about 10%.
- Retirement savings protection. This rider makes retirement savings contributions on your behalf while you can't work. The Guardian's Retirement Protection Plus rider, for instance, pays 100% of what you normally set aside for retirement, as well as any employer matching contributions, into a trust. A trustee invests the benefits at your direction.
Silver plans provide a good balance of monthly premiums with out-of-pocket costs. Coinsurance is 70% with a silver plan, meaning you will pay 30% of the costs after your deductible is met, up to the out-of-pocket limit. Silver plans are a good choice for people who are in generally good health but don't want high out-of-pocket costs if something goes wrong. Bronze plans are a popular choice with those who value low monthly premiums and are willing to pay more when they need care. Coinsurance is set at 60%, meaning you will pay 40% if you do need care, up to the out-of-pocket limit. Bronze plans are good for those who don't expect to need many services outside of preventative care throughout the year.
ACA platinum plans have the highest monthly premiums, but the lowest out-of-pocket costs. You'll pay more monthly in return for lower deductibles, copays and coinsurance amounts. Coinsurance with platinum plans is 90%, which means you pay 10% after the deductible, up to your out-of-pocket limit. Platinum plans are good for those who anticipate a lot of medical needs throughout the year.
Gold plans cost a little less than platinum plans, and come with higher out-of-pocket costs. The coinsurance amount on a gold plan is 80%, which means you pay 20% after the deductible, up to your out-of-pocket limit. A gold plan is a good idea if you think you'll need a lot of care throughout the year, but don't want to pay platinum premiums.Health insurance finder tool
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Employer-sponsored health insurance
Preferred-provider Organization (PPOs)
Preferred-provider organization (PPOs) plans are the most common type of
employer-based health plan. PPOs have higher premiums than HMOs and HDHPs, but
those added costs offer you flexibility. A PPO allows you to get care anywhere
and without primary care provider referrals. You may have to pay more to get
out-of-network care, but a PPO will pick up a portion of the costs.
Find out more about the differences between plansHealth maintenance organization (HMO)
Health maintenance organization (HMO) plans have lower premiums than PPOs.
However, HMOs have more restrictions. HMOs don't allow you to get care outside
of your provider network. If you get out-of-network care, you'll likely have to
pay for all of it. HMOs also require you to get primary care provider referrals
to see specialists.
Find out more about the differences between plansHigh-deductible health plans (HDHPs)
High-deductible health plans (HDHPs) have become more common as employers look
to reduce their health costs. HDHPs have lower premiums than PPOs and HMOs, but
much higher deductibles. A deductible is what you have to pay for health care
services before your health plan chips in money. Once you reach your deductible,
the health plan pays a portion and you pay your share, which is called
coinsurance.
Find out more about the differences between plansExclusive provider organization (EPO)
Exclusive provider organization (EPO) plans offer the flexibility of a PPO with
the restricted network found in an HMO. EPOs don't require that members get a
referral to see a specialist. In that way, it's similar to a PPO. However, an
EPO requires in-network care, which is like an HMO.
Find out more about the differences between plans
Learn more about individual insurance plans
Know more individual insurance / ACA 
Know more individual insurance / ACA 
Is disability insurance right for me?
Consider disability insurance if losing your income would make it difficult to cover your expenses and financial obligations. Illnesses and injuries outside the workplace also lead to disability claims, so your job does not need to be physically risky for coverage to be useful.
If you decide to pursue disability insurance, check with your employer to explore its offerings. Also, check with your organizations to see what they provide. Remember, with these types of plans, you lose coverage if you leave the employer or group.
You should also consider individual plans, which go with you if you leave your job.
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