Life involves risks. That’s why there’s insurance. People commonly buy auto insurance, homeowners insurance, health insurance and life insurance. Unfortunately, many people fail to secure insurance for one of biggest risks that they face: the risk of disability. A disability can prevent a person from earning an income, and that can put all of their other assets at risk.

Disability insurance for individuals provides important income protection.

Young workers may feel that they’re unlikely to experience disability, but that’s not exactly true. The Social Security Administration says that a 20-year-old has about a one-in-four chance of experiencing a disability before reaching retirement age, and the CDC says that about one in four U.S. adults has a disability.

Disability can strike anyone, and there are many different types of disabilities. Some stem from injuries and musculoskeletal disorders, while others are rooted in cancer, heart disease and other illness.

Disabilities can also impact cognitive function or mental health.

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Types of Disability

When disabilities occur, they frequently interfere with a person’s ability to work.

  • The person may be in too much pain or simply lack the energy to keep up with work. Certain medical treatments, such chemotherapy for cancer, can also cause side effects that can interfere with a person’s ability to continue working.
  • Certain disabilities may interfere with a person’s job functions directly. For example, a physical therapist with back problems may not be able to do the physical work that the job requires, while a surgeon with a hand injury may not be able to perform surgery.
  • As a result of the disability, the person may need to stop working. Although the Family and Medical Leave Act entitles many workers to time off, it does not entitle them to paid time off.
  • At the same time, the person may rack up various expenses related to the disability, including out-of-pocket medical bills that health insurance doesn’t cover and travel expenses if treatment is not available locally.

Disability poses a significant risk to anyone who depends on a paycheck. Disability insurance provides protection against this risk by replacing a portion of the lost income with disability benefits.

 

Long-Term vs. Short-Term Disability Insurance

There are different types of disability insurance. One of the key distinctions is between long-term disability insurance and short-term disability insurance.

 
1

Short Term Disability Insurance

As the name suggests, is intended to cover temporary, limited periods of disability. For example, a person going through a difficult pregnancy or recovering from injuries after a car crash may need to file a short-term disability claim. The maximum benefit period of coverage can vary, but it’s typically for less than a year.

2

Long-term disability insurance

provides longer coverage periods. Some policies even provide coverage that can last until the policyholder reaches retirement age. This is critical protection for disabilities that require a long recovery time or that are permanent.

 

How Workers Secure Disability Income Insurance

  • In the U.S., workers pay Social Security taxes, and if they become disabled, they can apply for Social Security Disability Insurance. However, the Social Security Administration has a very strict definition of disability, and many claims are denied for medial or technical reasons. Only around 21% of initial claims are approved, and the final award rate is only around 32%. This means that around two in three claims are denied, even after appeal.
  • People who think that Social Security will cover them if they ever experience a disability should also realize that the monthly disability benefits can be very small. As of January 2022, the average Social Security monthly benefit for all disabled workers was only $1,358.
  • Between the high denial rates and the low disability benefit amounts, Social Security Disability Insurance does not fulfil the needs of most workers. As a result, workers should consider securing private disability insurance coverage.
  • This is sometimes done through work. According to the U.S. Bureau of Labor Statistics, 35% of civilian workers have access to long-term disability insurance through work and 40% have access to short-term disability insurance through work. However, these group policies can be limited.
  • Even with group long-term disability insurance, the coverage period may not last for a sufficient period of time for some disabilities. Furthermore, because these policies are tied to a job, workers can lose coverage when they change jobs. Policies tend to replace only about 60% of income, and this amount can be further reduced by taxes and monthly benefit caps.
  • Individual disability income insurance provides another option, one that can either be used alone or in conjunction with work-based policies. Because individual disability insurance policies are purchased individually, they can follow a worker through job changes.

Customizing Individual Disability Insurance

Individual disability insurance policies can be customized with the riders and coverage terms that match the worker’s needs and budget. Here are some policy features to consider.

  • Compare options from different disability insurance companies. Different carriers offer different coverage terms, and they may have different underwriting processes, as well. To find a good match, you may need to get quotes from multiple carriers.
  • Choose the definition of disability. For workers with highly specialized and demanding jobs, including doctors, a policy with an own-occupation definition of disability usually makes sense. Other workers may be fine with an any-occupation definition of disability.
  • Choose the benefit and elimination periods. The elimination period, also called the waiting period, is the amount of time that you need to wait before filing a claim. It serves a similar purpose to an insurance deductible, but it’s measured in time. The coverage period, on the other hand, determines how long a policyholder can continue to receive benefits.
  • Make sure the benefit amount is sufficient. The percentage of pre-disability income that is replaced can vary, so this is a critical element of coverage to consider. Also keep in mind that a worker’s income usually increases over time. By choosing a policy with a Future Purchase Option rider, the policyholder can increase their benefit amount as their income increases, no additional medical underwriting required.
  • Choose additional riders. Insurance riders can add extra benefits, like student loan coverage and cost of living increases.

Even if employers already offer short-term disability insurance coverage, they should consider adding long-term benefits, as well. These two products serve different purposes, and short-term coverage cannot replace long-term coverage.

Adding this benefits doesn’t have to break a company’s budget, either. When employers offer LTDI as a voluntary benefit, employees can pay for the entire cost of premiums through payroll deductions. Offering coverage represents a minor investment on the company’s part, but the return in employee satisfaction can be tremendous.

The Cost of Individual Disability Insurance

  • Disability insurance usually costs around 1% to 3% of the policyholder’s income. This means that a person who earns $100,000 a year might pay an annual premium of $1,000 to $3,000. However, the exact cost will depend on several factors, including the policyholder’s risk and the coverage terms selected.
  • When thinking about the cost, it’s important to remember that disability insurance provides protection for a worker’s most valuable asset, i.e., their paycheck.
  • Most workers depend on a regular paycheck. If they can’t work because of a disability, the loss of income can lead to debt, foreclosure and bankruptcy. Individual disability insurance replaces some of the lost income so people can focus on their health without worrying about financial disaster.
  • If affordability is an issue, it can be possible to tweak coverage terms to bring the premium down. For example, you can increase the elimination period, choose an any-occupation definition of disability or get rid of unnecessary riders that add to the total cost.
Do You Need Disability Insurance for Individuals?

Getting disability insurance shouldn’t feel overwhelming.
At DIS, we can help consumers find an insurance agent, and we can help agents gets disability insurance quotes.

For more information on disability insurance for individuals, contact us at (800) 898-9641 or request a quote.

 
These resources make explaining coverage easy: