How does disability insurance work?

How to set up a safety net for your paycheck

Zack Sigel


Zack Sigel

Zack Sigel

Managing Editor

Zack Sigel is a managing editor at Policygenius who oversees our mortgages, taxes, loans, banking, and investing verticals.

Updated March 16, 2018|4 min read

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It’s easy to pretend accidents or ailments don’t happen, but the odds aren’t exactly in your favor. In fact, per the U.S. Social Security Administration, around one in four 20-year-olds will become disabled before they retire. That’s a scary stat, but there’s a way to at least set up a safety net. Long-term and short-term disability insurance protects your paycheck — and by extension, your family — if you can’t work due to illness or injury.

How Does Disability Insurance Work?

There are actually two types of disability insurance. Short-term disability insurance replaces a portion of your paycheck for a short period of time. Think three to six months. Most people get STDI through their employer. You can get an individual policy through some private insurers, but these plans generally cost more than they’re worth.

Long-term disability insurance (LTD), on the other hand, provides coverage if you’re out of work for a longer period of time. Think years or even decades. It, too, is sometimes offered by employers, but the benefit is less common. Plus, the coverage is often inadequate. That’s why people often take out supplemental LTD policies. You can also take out an individual long-term disability policy if the benefit isn’t provided by your employer. Policies generally fall into two buckets:

  • Own occupation disability insurance: This policy defines a disability as the inability to work at your regular occupation, even if you still might be able to work at another occupation. For example, a surgeon with hand tremors who takes a job as a medical school lecturer would be eligible for benefits under an own occupation policy because he can’t perform the duties of his own occupation.

  • Any occupation disability insurance: To qualify as disabled under this policy, you must be unable to work at any occupation. This is a harder policy to claim benefits from, but it’s also usually less expensive than an own occupation policy.

Learn more about different features of long-term disability policies.

If you can afford an “own occupation” policy, that’s what you should get. We also recommend a non-cancelable and guaranteed renewable policy (sometimes only available as a rider). Non-cancelable means the insurer can’t change the terms of your policy (including the premium rate), as long as the premiums are paid. “Guaranteed renewable” means your policy can’t get canceled so long as your premiums are paid.

LTD and STDI policies work best in tandem. That’s because long-term disability insurance doesn’t kick in right away. There’s an elimination period you’ll wait out. It’s usually anywhere from 30 to 365 days … or hopefully right around the time your short-term disability insurance expires. LTD policies typically pay out for two, five or ten years or until retirement. The average individual disability claim lasts for a little under three years, according to the Council for Disability Awareness. Disability insurance can help you if you need long-term care.

Policygenius makes it easy to compare disability insurance companies to find one that works best for you. Here’s a look at how long-term disability insurance and short-term disability insurance typically work.

How Does Long-Term Disability Work?

Let’s start with the application process, which takes about four to six weeks to complete.

  • 1. Compare quotes. All insurance companies have their own ways of assessing applicants, and everyone is different (health, job, etc.) so you’ll probably get different rates from different companies. Use a comparison tool like Policygenius to get multiple quotes, and choose the one that gives you the best coverage for the cheapest rate.

  • 2. Fill out the paperwork. You’ll complete a basic application, covering basic info and job details. Be prepared to provide income documentation — either your latest tax return or employment offer letter, if you’re changing jobs. You’ll also sign authorization forms so your health information gets sent to your prospective insurer(s).

  • 3. Take the medical exam. Your broker or, in some cases, the insurer directly will call or email to set up a paramedical exam. The medical exam takes about 30 to 45 minutes. A technician will come to your home or workplace (yup, they come to you) to take your height, weight, pulse, blood pressure and a blood and/or urine sample. The results get sent to the insurance company’s underwriters. Be sure to mention any pre-existing conditions you have, which could affect your coverage.

  • 4. Do a phone interview. A rep from the insurer will call to ask some questions about your lifestyle (do you travel a lot? What are your hobbies, etc.?) and medical history. It’ll take about 20 to 25 minutes of your time. Your insurance broker generally gives you a heads up on what questions to expect. Have the name, phone number and address of your primary physician handy, as the rep generally asks for that info.

  • 5. Underwriting and approval: Underwriting accounts for two to four weeks of the application process. Generally speaking, the more complex your health history, the longer it takes. Once your policy is ready, your broker or the insurer will deliver it to you.

  • 6. You purchase a disability insurance policy. You’ll have to sign a delivery receipt and authorize a payment method to activate the policy. Expect long-term disability insurance costs around 1% to 3% of your annual salary.

Once you have the right long-term disability insurance policy in place, you’ll start paying your monthly premiums. In the event that you’re injured or too ill to work, here’s what you’ll need to do:

  • 1. File a disability claim. An LTD claim generally requires information about your job and diagnosis (usually statements and documents from your physician). The insurance company will review the claim and either approve it, request more information, or deny it as appropriate. You need to be able to show that you are unable to work.

  • 2. Wait out the elimination period. We mentioned this earlier. All LTD policies require a claimant remain disabled for a period of time between when the disability begins and the benefit payments start. (Otherwise, short-term disability insurance applies.) Most commonly, these periods are 30, 60 or 90 days, but there are longer waiting periods of 180 and 365 days also available. Typically, the longer the elimination period, the lower the premiums. Just remember, you’ll have to cover costs out-of-pocket until coverage kicks in. We typically recommend a 90-day elimination period.

  • 3. Receive your benefits. Once a disability claim is approved and the elimination period expires, you’ll receive your monthly benefit for as long as your disability lasts, for up to the defined “benefit period.” Companies provide benefit periods as short as two years and as long as right up to retirement age (67), when Social Security benefits would take over (PolicyGenius recommends going the “until retirement” route). The longer the benefit period, the higher the premium.

  • 4. Return to work when you’re able. Payments end if and when you can fully return to your regular occupation. However, depending on your policy and/or the riders you purchased, you can sometimes still collect benefits if you can return to your regular occupation in a limited capacity or only work in a different occupation.

How Does Short-Term Disability Work?

As we mentioned earlier, short-term disability insurance is most commonly obtained through an employer-sponsored group plan. Those plans are “guaranteed approval,” meaning you won’t have to take a medical exam or go through the stringent underwriting associated with an LTD policy. If you’re applying for STDI with a private insurer, however, you’ll likely take a medical exam.

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Policy terms vary by employer. Some cover your premiums completely, while others ask you to pay a small portion to participate. It’s also common for coverage to kick in only after you’ve worked for a set period of time or if you work at least 40 hours a week.

State law plays a role here, too, though. Some states, including California, Hawaii, New Jersey, New York or Rhode Island, actually require employers to provide short-term disability coverage. Still, here are a few general policy guidelines:

  • STDI plans typically cover up to 80% of your gross income.

  • Disabilities generally include chronic conditions like back injuries, cancer, and heart disease, off-the job injuries and, sometimes, pregnancy. They don’t include injuries sustained at work; those fall under workers' compensation.

  • Most short-term disability benefits replace a portion of your income for 30 to 120 days, with a maximum benefit period of 52 weeks. There are sometimes caps on the monthly payment amount, too.

  • Coverage usually kicks in between one to 14 days after the injury or diagnosis, though the exact timeframe could vary, depending on whether you’re ill or injured.

To receive payment, you’ll have to file a claim with the insurer, whether you’re working with them directly or through an employer. To learn exactly how your short-term disability policy works, be sure to review your coverage with a human resource representative or broker.

How Much Does Disability Insurance Cost?

It depends. Long-term disability premiums are based on age, gender, occupation and features, but you can generally expect to pay between 1% to 3% of your annual salary for a policy. Remember, you’ll want the benefit amount to cover you if you’re out of work for an extended period. The good news here, though: When you buy an LTD policy (as opposed to signing up for one offered by an employer), the benefits aren’t taxed. That means a policy that pays out 60% of your gross income would effectively replace most of your take-home paycheck. You can learn more about how disability insurance rates are calculated here.

Learn more about how much long-term disability insurance costs.

Note that if you have a pre-existing condition, it could cost more to get covered.

Short-term disability, on the other hand, can cost anywhere between $0 and way too much, depending on where you get it from. That’s why we generally only recommend short term disability insurance offered by your employer. Private policies almost always falls into the “way too much” category, so you’re better off just self-insuring for the short term — i.e. socking those “premiums” away in an emergency savings account — and purchasing a LTD policy instead.

Recommendation Recap

While specifics vary from case to case, our Geniuses generally recommend the following features for a long-term disability policy.

  • An untaxed monthly benefit of approximately 60% of your total gross income and close to your take-home pay.

  • A 90-day elimination period between the start of your disability and the receipt of your first check.

  • An own occupation policy, which defines a disability as the inability to work at your regular occupation, even if you still can work at another occupation.

  • A non-cancelable, guaranteed renewable policy so your premiums are locked in and your policy isn’t up for cancellation.

  • A benefit period to age 67, meaning if you get permanently disabled from working in your 30s, you’ll be covered until 67 when your retirement benefits take over.

  • Residual disability coverage, which pays benefits if you can work some time but not all of the time due to a disability. (It covers the partial loss of income with a partial payout of your disability benefit.)

Finally, remember, disability insurance doesn’t cover your loved ones if you die. You’ll need life insurance for that. You can find a primer on life insurance here.