Disability insurance is one of the most important types of insurance you can buy, yet it’s often overlooked. Many are eager to purchase home insurance and car insurance because it seems obvious that those might be damaged. However, many fail to consider how a disability might leave them unable to earn income. Furthermore, you might not even think about disability insurance because your employer already covers you. Whatever your employment situation, you should still think about disability insurance, here’s what you should watch out for.

Table of Contents:

  • What is disability insurance?
  • What does disability insurance protect?
  • What’s the difference between short-term and long-term disability insurance?
  • What types of disabilities does disability insurance cover?
  • Can I get disability insurance if I’m self-employed?
  • Is disability insurance necessary?

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What is disability insurance?

Simply put, disability insurance preserves your income in the case you suffer a disability that makes you unable to work. Some companies protect their employees with disability insurance, however, those who are self-employed will need to purchase a plan themselves. Once you succumb to an injury, you can go on short-term disability after a couple of weeks. If you’re still unable to work a few months later, you could be put on long-term disability indefinitely, depending on your plan.

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What does disability insurance protect?

In general, disability insurance protects your income in the case you are unable to work. We can also discuss the scope of disability insurance by breaking down the policy, so you can understand how your income is protected. The following are the 4 components of a disability insurance policy:

1. Insurance Premium

The insurance premium is the amount your or your employer pays for the policy.

2. Insurance Benefit

The benefit is what is paid to you in the case of a disability. The amount you receive depends on the plan you or your employer chose. Typically, the benefits you receive are not taxed unless they were paid out based on your pre-tax income. In the case of group policies paid for by your employer, you might also have to pay tax. It’s important to note that the benefit will only cover up to 70-80% of your income, so you might not be able to live as you did before the injury.

3. Benefit Periods

The time you must wait to receive your benefits depends on the policy, is it a short-term or long-term disability benefit? In the case of short-term disability, you will also have to wait about two weeks to begin receiving benefits, which is the length of the average wage payment period for most people. For long-term disability, you could wait for 3 to 6 months, depending on your need and also when the short-term disability tapers off.

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Definition of Disability

The definition of what constitutes a disability will vary by the policy; it could be an own-occupation disability policy or an any-occupation disability policy. Own-occupation disability is the most wide-ranging policy type as it covers you in the case that you are unable to perform the occupation your employer expects you to perform. On the other hand, any-occupation disability will only pay benefits if you are unable to reasonably perform any occupation your employer deems suitable.

As you can see, the definition of disability is the main determinant of what your policy protects. You can extend these definitions further based on the different types of professions and specializations that exist. Of course, the scope of what your disability insurance protects will affect its price.

Finally, you might be entitled to receive partial disability in the case of an injury that prohibits you from continuing the work that your employer expects from you. In that case, you’ll only receive a portion of the benefit, and you might even continue to work in some capacity.

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What’s the difference between short-term and long-term disability insurance?

Short-term disability insurance generally covers you immediately after you are injured and unable to work. Meanwhile, long-term disability insurance will support after a few months of being incapacitated. It’s often said that long-term disability insurance is more important, while some have enough saved to miss a few months of income, 63% of Americans would not be able to survive 6 months without an income.

Short-term disability will typically replace your income for 13-26 months and benefits range between 40 and 70% of your income. Oftentimes, these benefits are offered through a group insurance policy at your workplace, these policies are more expensive to purchase as an individual. Typically, people only need short-term disability after they break an arm or undergo surgery.

By contrast, long-term disability is typically activated when your suffering extends past 3-6 months and continues to make you unable to work. This type of disability policy is usually offered by your employer or by your financial advisor. Sometimes, these policies will cover permanent disability, paying you benefits until you turn 65. Unfortunately, other policies only cover 5 to 10 years of disability.

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What types of disabilities does disability insurance cover?

Injuries aren’t the only thing that disability insurance covers. Mental health disorders, cancers, pregnancies, and musculoskeletal disorders make up the vast majority of disability insurance claims. While these types of afflictions might seem rare, they are quite common over a time horizon that spans your entire life. Over a quarter of Americans currently have a disability, thus, it’s not unlikely that you could require disability insurance in the future.

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Can I get disability insurance if I’m self-employed?

Disability insurance is available to everyone, even if you’re self-employed. However, short-term disability insurance for those who are self-employed is quite expensive, it might be more advantageous to keep an emergency fund to tide you over for a few months instead of paying pricy insurance premiums.

If you’re self-employed, that means you’ll need to find an insurance provider yourself. Here are four things you should look out for:

  1. Beware of the definition of disability. As we mentioned earlier, some disability coverage will only cover you if you can’t reasonably perform any tasks for a client or employer whatsoever.
  2. Know the benefit amount that the disability policy will pay you in the event of a claim.
  3. Ensure that your policy is guaranteed to be renewable, so you don’t have to spend more every year.
  4. Check that your insurance provider is charging you the same premiums as the year you initially purchased the insurance policy. You should pay the same premiums every year as long as you pay them on time.

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Is disability insurance necessary?

In summary, disability insurance is important, but long-term disability insurance is crucial. If you don’t have any money at all saved for a few months off work, short-term disability insurance is also a necessity. However, a long-term disability could devastate even the most reasonable saver. Interestingly, the average long-term disability lasts nearly 3 years, you wouldn’t want to leave yourself hung out to dry.

Spending on disability insurance is akin to spending money on home or car insurance. If you feel your savings can’t handle damage to your car or your home, then why would you feel comfortable leaving your earning power uninsured? You can’t survive without a steady income, just like you can’t survive without a home.

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