How does disability insurance work?

Disability insurance replaces your paycheck if you’re too ill or injured to work.

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Nupur Gambhir

Nupur Gambhir

Life Insurance Expert

Nupur Gambhir is an insurance editor at Policygenius and licensed Life, Health, and Disability agent in New York.

Updated October 5, 2021|3 min read

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Around one in four 20-year-olds will become disabled before they retire. And as you age, the chances of a disability only increase. That’s a scary stat, but there’s a way to make sure you have a safety net — disability insurance. Disability insurance protects your paycheck — and by extension, your day-to-day life — if you can’t work due to an illness or injury.

How disability insurance works

Disability insurance pays out about 60% of your non-taxed income regularly — like a paycheck. But to receive these payments, your disability needs to fall into your policy’s “definition of disability.” There are two buckets:

  • Own-occupation disability: A disability is defined as the inability to work at your regular job, even if you still might be able to work at another job. A surgeon with hand tremors who takes a job as a medical school lecturer would be eligible for payments under own-occupation because they can’t perform the duties of their original occupation.

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

You can also add on other features to your policy to make sure it serves you when you actually need it, such as riders or a non-cancelable clause which prohibits the insurers from ever changing the terms of your policy. 

How does short-term disability insurance work?

You’ll need a mix of short-term and long-term disability insurance plans. Short-term disability insurance replaces a portion of your paycheck for three to six months and is usually offered for free or subsidized through an employer. You can get an individual policy through some private insurers, but short-term plans generally cost more than they’re worth. 

Most short-term disability benefits replace a portion of your income for 30 to 120 days, with a maximum benefit period of one year. There are sometimes caps on the monthly payment amount, too. You can usually start receiving payments within two weeks of a disability, but you won’t be covered in the long-term if your disability lasts over a year — which is why it’s important to have long-term disability insurance. 

Learn more about short-term disability insurance

How does long-term disability insurance work?

Long-term disability insurance (LTD), unlike short-term disability insurance, 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. Most people buy their one private LTD plan to get adequate coverage.

→ Learn more about long-term disability insurance

How short-term and long-term work together

Long-term and short-term policies work best in tandem. Because long-term disability coverage doesn’t begin to pay out immediately, a short-term plan provides some financial support while you wait for your long-term payments to begin.

The best option is to buy your own individual long-term disability plan and supplement it with an employer-sponsored short-term plan.

How to get disability insurance 

The application process takes about four to six weeks to complete. There are six steps to getting coverage:

  1. Shop around and compare quotes from multiple insurers.

  2. Fill out the application paperwork.

  3. Do a phone interview about your lifestyle and medical history.

  4. Take the medical exam.

  5. Wait for an application decision.

  6. Sign your policy and make the first payment.

After this, you’ll have disability insurance coverage. 

In the event that you actually need those disability insurance payments, the process is fairly simple. You’ll file a disability claim with details about your diagnosis and proof that you are unable to work, wait out the elimination period, and then get your disability payments for the period your policy offers.

→ Learn more about how to get disability insurance

How much does disability insurance cost?

You can generally expect to pay between 1% to 3% of your annual salary for a policy, but if you have a pre-existing condition, it could cost more. 

The good news here, though: When you buy an LTD policy, 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. 

Private short-term disability plans, on the other hand, cost way too much for the amount of coverage it offers. That’s why we generally only recommend short-term disability insurance offered by your employer. 

→ Learn more about disability insurance rates here

Disability insurance replaces your paycheck if you can’t work, and a policy with enough coverage pays out almost all of your take home pay. Disabilities become more likely as you age, making disability insurance an important part of your financial plan. 

Frequently asked questions

How long does disability insurance pay for?

Disability insurance can pay as long as you need to — even all the way up to retirement. You’ll need to get a long-term disability insurance policy to ensure the payout is long enough.

Is disability insurance based on income?

Yes. The amount of disability insurance coverage you get is dependent on how much you earn. You’ll generally pay 1-3% of your salary on premium payments for a private plan.

What qualifies for a long-term disability?

A long-term disability lasts three months or longer. Whether or not you qualify for your policy’s definition of disability depends on if you purchased own-occupation disability insurance or any-occupation disability insurance.

What qualifies for a short-term disability?

A short-term disability lasts for six months or less. Whether or not you qualify depends on your policy. Some policies pay out if you cannot work your actual job, but can work another job. Others may only pay out if you cannot work any job.