What Is Disability Insurance?

Disability insurance can replace your income if you have to leave the workforce for a medical issue. Here’s what you need to know about it.

Written by Erin Gobler / June 9, 2022

Quick Bites

  • Disability insurance is designed to replace your income in the case of incapacity.
  • Disability insurance policies can be short- or long-term.
  • The cost of disability insurance depends on several factors, including your age, gender, occupation and more.

According to the Insurance Information Institute, roughly 43% of Americans aged 40 will have a long-term disability before they turn 65.[1] Depending on the situation, a disability could prevent you from working for anywhere from weeks to years. Yet most people don’t have emergency savings to replace their income during this time.

Enter disability insurance. It can provide a replacement and support you and your family. Keep reading to learn more about how disability insurance works and whether it’s right for you.

Inside this article

  1. What is disability insurance?
  2. What does it cover?
  3. How does it work?
  4. Short-term vs. long-term
  5. Any- vs own-occupation
  6. Factors that affect rates
  7. How to sign up
  8. Is disability insurance worth it

What is disability insurance?

Disability insurance is a contract between you and an insurance company where the insurer promises to replace part of your income if you’re unable to work because of a disability in return for premium payments.

Your employer can provide you with disability insurance, or you can get similar benefits from the Social Security Administration. Supplemental coverage is also available.

It can provide financial security for periods as short as a few weeks or even until retirement.

What does disability insurance cover?

You might be surprised to learn that disability insurance covers a wide variety of situations, many of which we don’t necessarily think of as disabilities.

Guardian Life Insurance reported the most common cause of short-term disability claims came from maternity leave (The U.S. offers no official paid maternity leave), which made up about 26% of claims in the year through March 2019.

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Other common claims include musculoskeletal issues and injuries, like bone fracture or carpal tunnel syndrome.

For long-term disability, the most common claim is cancer. Other examples include circulatory and musculoskeletal issues, as well as mental health.[2]

How does disability insurance work?

Just like any insurance, you pay a monthly or annual premium for your policy. If you need to file a claim, your benefit would replace a portion of your income during your disability.

Depending on the policy, it’s likely to provide anywhere from 45% to 65% of your gross income on a tax-free basis.[3]

When you file a disability insurance claim, there can be an elimination period, which is the period between the start of your disability and when you can start receiving benefits. Depending on the type of disability insurance, it could be as long as several months.[7]

Short-term vs. long-term disability insurance

There are two types of disability insurance: short-term and long-term.

Short-term disability insurance is designed to provide a temporary income when you’re out of work for a short period, often ranging from a few weeks to several months.

Many people receive their short-term disability coverage as a benefit through their employer. These policies generally don’t have elimination periods and can provide coverage for everything from maternity leave to a car accident.

Long-term disability insurance provides coverage when someone has to be out of work for a longer period. These policies have elimination periods that can last anywhere from one to six months. After that, you can receive benefits for as long as the policy allows. In some cases, a long-term disability insurance policy will provide benefits until someone is old enough to collect retirement benefits.

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In the case of employer-sponsored disability insurance, short-term and long-term policies often go hand-in-hand. The short-term policy will last for the duration of the elimination period for the long-term policy. Once the short-term policy expires, the long-term one kicks in.

Any-occupation vs. own-occupation disability insurance

“Some policies cover disabilities that keep you from doing your own specific occupation, while others will only provide a benefit if you are fully disabled and unable to work,” says Evon Mendrin, a Certified Financial Planner and founder of Optometry Wealth Advisors, a financial planning firm for optometrists.

These policies are known as any-occupation versus own-occupation disability insurance. In the case of any-occupation insurance, your policy will provide coverage only if you have a disability that prevents you from doing any job that’s suitable for your education and training, even if it’s at a lower level with less income.

This type of policy is more affordable but clearly has some downsides.

“What if you're a highly specialized professional, a software engineer, optometrist, dentist, surgeon, or business owner? After years of school and experience, would you want to take any other job in your field that might be considered reasonable or suitable?,” Mendrin says.

In the case of an own-occupation policy, you’ll receive your benefit if you have a disability that prevents you from doing your current job. These policies are more expensive than any-occupation insurance. But for someone with a specific skill set who doesn’t want to be forced to work in another industry or job, it may be worth the added cost.

Factors that affect disability insurance rates

The primary factors that affect your disability insurance rates are those we’ve already discussed, such as whether it’s short-term or long-term insurance and whether it provides coverage if you can’t work in any occupation or only your own.

However, there are several other factors that can affect your insurance premiums.

  • Age: It’s probably no surprise that the older you are, the more likely it is that you’ll have to take time off for a health issue. As a result, older individuals tend to pay higher rates for disability insurance. However, you may be able to lock in a lower rate while you're younger.

  • Gender: With all other factors being equal, younger men tend to pay lower insurance rates than younger women, since women are more likely to file claims for reasons such as maternity leave. But as people age, insurance rates tend to rise much more quickly for men, since they’re more likely to need to use the policy when they’re older.

  • Health: The healthier you are, the lower the rates you’ll pay for disability insurance since you have a lower chance of having to take time off due to a disability.

  • Occupation: If you work in a dangerous occupation, you’re more likely to pay a higher premium for your disability insurance since you have a higher chance of an injury on the job.

  • Benefit period: In the case of long-term disability insurance, benefit periods can range from a few years all the way until you retire. As you can expect, the longer your benefit period, the higher your insurance rates are likely to be.

  • Elimination period: Just like a deductible with other types of insurance, you can often increase or decrease your insurance premiums by decreasing or increasing your elimination period. The longer you’re willing to wait to start coverage, the lower the rate you’ll pay for insurance.

  • Coverage amount: Disability insurance is designed to replace a percentage of your income. As a result, the higher your current income—and, therefore, the higher your disability income—the higher your insurance premiums are likely to be.[4]

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How to sign up for disability insurance

If you’re in the market for disability insurance, your employer is a great place to start. Many companies offer disability insurance in their benefits package, meaning they pay the premiums on your behalf. In fact, you might already have coverage.

If your employer doesn't cover your disability insurance, they may still offer a group insurance plan. Group policies are often cheaper than individual ones (given the scale), so it’s worth exploring whether the company has a plan available to sign up for.

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If you don’t have coverage through your employer and there’s no policy available, you can sign up for an individual plan. You can often get coverage through a professional organization. For example, freelance workers can sign up for a group disability policy through the Freelancers’ Union. Similar policies are available for workers in many industries.[5]

A final option is to shop for an insurance policy on your own. You can either hire an insurance broker to find a policy on your behalf or get quotes directly from insurance companies.

Is disability insurance worth it?

Unfortunately, disability insurance comes with a large price tag, especially compared to other types of insurance. That said, in the event that you do need to file a claim, the payoff may be greater than it would be for other types of insurance.

The cost of disability insurance typically ranges from 1% to 4% of your annual income per year. So for an income of $100,000, your insurance premiums are likely to range from $83 per month to $333 per month.[6]

While it may be expensive, nearly all financial experts would recommend it for workers because the chances you face a disability of some kind during your career is high.

“It's one of the most underrated ways to manage a huge financial risk, especially for more highly-trained professionals,” Mendrin says. “The premiums might be higher than what you see in life insurance, but the odds of disability are also higher. “

Article Sources
  1. “Disability Income Insurance.” Insurance Information Institute. https://www.iii.org/main-responsive/disability-income.
  2. “Disability Insurance.” Guardian Life Insurance. https://www.guardianlife.com/disability-insurance.
  3. “Consumer Guide to Disability Income Insurance.” National Association of Health Underwriters. https://nahu.org/looking-for-an-agent/helpful-guides/consumer-guide-to-disability-income-insurance.
  4. “The cost of long-term disability insurance.” Guardian Life Insurance. https://www.guardianlife.com/disability-insurance/long-term-disability-insurance-cost.
  5. “Disability Insurance.” Freelancers Union. https://www.freelancersunion.org/insurance/disability/.
  6. “How much does disability insurance cost per month in 2022?” Breeze. https://www.meetbreeze.com/disability-insurance/how-much-does-disability-insurance-cost/.
  7. “Disability insurance elimination/waiting periods: What to know in 2022.” Breeze. https://www.meetbreeze.com/disability-insurance/disability-insurance-elimination-period/#:~:text=A%20disability%20elimination%20period%20%E2%80%94%20or,after%20the%20insured%20becomes%20disabled

About the Author

Erin Gobler

Erin Gobler

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

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