Supplemental disability insurance

Extra protection for your income.

You may already have some long-term disability insurance through work—many employers offer it in their benefits package these days. However, the coverage you get from work likely isn’t enough to pay all your expenses if you get sick or injured and aren’t able to work for more than a few months.

What is supplemental disability insurance?

Supplemental disability insurance is meant to cover the gap between what you’ll get from your current long-term disability policy and what you’d actually need to maintain your current lifestyle if you’re unable to work due to illness or injury.

If you don’t have long-term disability insurance through work, you should buy a standard private long-term disability insurance policy (LTD) instead of supplemental.

Why you might want supplemental disability insurance

The most obvious reason to want any kind of long-term disability insurance is that 1 in 4 people experience a disability lasting longer than three months during their careers. But remember when we said the LTD policy you get through work likely isn’t enough to fully cover you in the event of an actual disability? There are a few reasons for that.

1. The benefit amount may be too small

Many employers pay the cost of employees’ long-term disability insurance as a benefit. Sweet, right! The only problem is, the payout you’ll ultimately get from this policy gets taxed—at least at 25%. When you buy your own long-term disability insurance—including supplemental disability—the benefit amount is tax-free since you pay the policy-premiums with after-tax dollars. (Note: Some employers offer long-term disability insurance, but don’t pay for it. In that case, if you opt into the group plan and pay your own premiums, the benefit is also tax-free.)

The benefit amount of a long-term disability insurance policy is usually about 60% of your gross (pre-tax) annual salary. That means that a private policy will net you very close to 100% of your take-home pay, but a benefit you get through work is often considerably less, since it’s likely taxed. In addition, many employer-paid long-term disability insurance policies only cover 50% or less of gross income instead of 60%, and come with a cap on the benefit payout. In either case, a supplemental disability insurance policy fills the gap and makes sure you’re covered to 100% of your take-home pay in the event of a long-term disability.

2. The benefit period may be too short

LTD policies let you set the benefit period. A policy that covers you for 15 years in the case of a disability costs more than a policy that covers you for 2 or 5 years. If the long-term disability insurance you have through work only offers a benefit period of 2 years, it’s likely not enough to fully protect you since most long-term disabilities last around 3 years (and, of course, some last much longer). If the benefit period on the LTD policy you have through work is any less than 5 years, consider a supplemental disability insurance policy to hedge your bets.

3. Your employer may have an “any occupation” policy

Not all LTD policies are created equal. Some pay if you’re too disabled to return to your current job—the one you trained for, and the one that pays your bills. This is called an “own occupation” long-term disability insurance policy. However, an “any occupation” policy pays if you’re too disabled to do any kind of work. This means if you’re capable of still working a much lower-paying job, an “any occupation” policy won’t pay. This can be double whammy—not only will you lose out on your disability insurance benefit, but you also can’t collect a big enough paycheck to cover your expenses. If the LTD policy you have through work is any occupation instead of own occupation, consider a supplemental disability policy to better protect yourself.

4. Employer-sponsored disability insurance doesn’t play nice with Social Security disability insurance

Under certain circumstances, you’re eligible for Social Security Disability Insurance (SSDI). More than half of SSDI claims are denied, but even if you’re approved that money will cut into the benefit amount you get from your employer-sponsored long-term disability insurance. And remember—that amount could already be taxed. If you buy private long-term disability insurance, including supplemental disability, the benefit amount isn’t impacted if you also qualify for SSDI.

5. You’ll lose it if you switch jobs

The danger with all work-provided long-term disability insurance is that if you lose your job or change gigs, you lose your disability insurance. However, a supplemental disability insurance policy will stick with you. Not only that, if you add a future purchase rider to your supplemental disability insurance, you can add primary long-term disability insurance after you change jobs without going through the whole application process again. Wait…What’s a future purchase rider? So glad you asked!

Supplemental disability insurance riders

There are some extra features, called riders, you can add on to a supplemental disability insurance policy. Here are a few worth considering.

  • Future purchase: So you’ve got a long-term disability policy through work, and you’re adding supplemental disability insurance to cover any gap in coverage. If you leave your job, you’ll lose your primary LTD policy. But if you add a future purchase rider on to your supplemental policy, you’ll secure the right to purchase a primary private LTD policy if you need to replace the one you had through work. And you can purchase it without going through the whole application process again. 

  • Waiver of premium: If you’re disabled, you’ll need the money from your insurance benefit to live on. You don’t want to have to your benefit to pay your disability insurance premiums—that would defeat the point! A waiver of premium rider allows you to skip the premium payments as long the disability lasts. You should consider this rider with any kind of LTD policy, whether primary or supplementary.
 ##Other types of disability insurance

In addition to supplemental disability, there are a few other types of disability insurance you should know about. We’ve got a full explainer on how disability insurance works here, but below is a quick take.

  • Long-term disability insurance: This is primary policy that your supplemental disability policy will boost. 

  • Short-term disability insurance: Usually provided by an employer, this will cover you for a disability lasting less than 90 days. If you experience a long-term disability, short-term disability insurance will cover you during the waiting period before your long-term disability insurance kicks in.

  • Social Security Disability Insurance: Long-term disability insurance provided by the government—however less than half of applicants are accepted and the benefit is generally significantly lower than a private LTD policy.