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What Is Disability Insurance and What Does It Cover?

You’ve heard about disability insurance, but you’re not sure if you need it. Before you can decide, you need to know: what is disability insurance and what does it cover?

What Is Disability Insurance?

Disability insurance is sometimes called paycheck protection or income protection. If you are unable to work due to a disability, the policy can replace a portion of your pre-disability income. This enables you to make ends meet while you focus on your health. You can use the benefits however you want – for example, to pay your bills, buy groceries, or cover your medical expenses.

Let’s compare disability insurance to life insurance. Both provide financial protection in case something happens to a breadwinner. However, there are two key differences:

  • Life insurance provides financial protection against the risk of death, whereas disability insurance provides financial protection against the risk of disability.
  • Life insurance protects loved ones in the case the insured dies unexpectedly. Disability insurance protects the insured as well as loved ones who depend on the insured financially in the case the insured is disabled unexpectedly.

Many people purchase life insurance but neglect to purchase disability insurance. This can be a major oversight because working-aged individuals are actually more likely to experience disability than death. According to the Social Security Administration, someone who is 20 years old today has an approximately one in eight chance of dying and an approximately one in four chance of becoming disabled before turning 67. Considering how much more common disability is among working-aged people, it makes sense to protect yourself against this risk.

What Does Disability Insurance Cover?

Disability insurance can cover a wide range of illnesses and injuries. According to the Council for Disability Awareness, most long-term disabilities are due to illnesses such as cancer, heart attack, and diabetes. Back pain, arthritis, and injuries are also common causes of disability.

Many disability insurance companies also provide coverage for mental illness. This is important because mental illness is incredibly common. According to the CDC, more than 50% of people will be diagnosed with a mental illness or disorder at some point during their life and one in five Americans experiences mental illness each year.

It’s important to check the terms to see exactly what a policy covers. For instance, some policies don’t cover pre-existing conditions. However, disability insurance policies generally define disability based on a person’s ability to work. In other words, if you can’t work due to your injury or illness, there’s a good chance you’ll qualify for disability insurance benefits.

Disability insurance policies typically use one of two broad definitions of disability:

  • An any-occupation definition of disability considers a person to be disabled if he or she cannot work in any occupation. For example, if you’re an accountant and a cancer diagnosis prevents you from working at your job or any other job, you will likely qualify for benefits. However, if you’re a surgeon and a hand injury prevents you from performing surgery but you are still capable of working in other occupations, you will not qualify for benefits.
  • An own-occupation definition of disability considers a person to be disabled if he or she cannot work in his or her normal occupation – i.e., the job the person had before the disability. With this type of coverage, a surgeon who can no longer perform surgery because of a hand injury can qualify for benefits, even if the surgeon could work in other occupations.

As own-occupation disability insurance provides broader coverage, it’s often presented as the gold standard of disability insurance. This type of coverage is important for professionals in specialized jobs who would have to take a massive pay cut if they had to switch to a different occupation. However, own-occupation disability insurance is also more expensive than any-occupation disability insurance coverage, meaning it may not be worth the additional cost for all workers.

What Are the Different Types of Disability Insurance?

There are multiple types of disability insurance, all with their own advantages and disadvantages.

  • Social Security Disability Insurance: This is a federal program. Since it’s funded by payroll taxes, you’re likely paying into the program already if you work. For this reason, some people assume they’re already covered and don’t need additional disability insurance, but they may experience a rude awakening if they ever need to apply for Social Security Disability Insurance benefits. First of all, the eligibility requirements are strict, with the majority of applications being denied. Additionally, the benefits are modest. As of January 2023, the average monthly Social Security benefit for all disabled workers is only $1,483.
  • Workers’ Compensation: Although this isn’t exactly a type of disability insurance, it’s similar enough to include here. Since states typically require employers to carry workers’ compensation for their employees, the majority of employees have this protection. However, not everyone is covered – for example, independent contractors and self-employed individuals may not have workers’ compensation coverage. Furthermore, workers’ compensation only covers work-related injuries and illnesses. If you are injured outside of work or you become sick from cancer, stroke, diabetes, or another illness not directly connected to your job, you won’t have coverage. This is why it’s important to secure true disability insurance.
  • Group Short-Term Disability Insurance: Some employers offer group short-term disability insurance to workers. These policies typically have benefit periods of under a year, although some benefit periods are six months or less. If your disability continues past this period, you will stop receiving benefits, even if you can’t work. Since many employers offer limited paid time off, this coverage can be important, but you may need to supplement it with additional, longer-lasting coverage.
  • Group Long-Term Disability Insurance: Some employers also offer group long-term disability insurance benefits. These policies offer longer benefit periods. Plus, the group rates and underwriting can make them affordable and easy to access. However, the benefit amounts and terms may be limited. For example, a policy may only replace 60% of your income with a $5,000-a-month cap. Furthermore, these benefits will typically be taxed. If you need more coverage, you can supplement your group disability policy with individual disability insurance.
  • Individual Disability Insurance: This is a disability policy you can purchase on your own from a variety of top disability insurance companies. The benefits are often not taxed and you can select the terms that meet your needs by customizing the elimination period, benefit period, and riders.

Now you know what disability insurance is and what it covers, but you may still have more questions. An insurance agent can review your disability insurance options to help you buy a disability insurance policy that meets your needs. Find an agent.