Disability insurance is protection against the loss of your income when you become disabled due to an injury or illness. Many people buy disability coverage or receive coverage through their employer.
The coverage you buy for yourself is almost always going to be long-term disability insurance (LTDI), which protects your income for a number of years. Short-term disability insurance, which you’ll probably only encounter as part of a subsidized employee benefits package, covers you just for a few months and never more than a year.
However, if you can’t afford either of those types of disability insurance, you may still be eligible for Social Security disability insurance (SSDI), which doesn’t cost you anything. However, the Social Security Administration defines disability so strictly that just 35% of claimants receive Social Security disability insurance benefits, and the appeals process if you get declined on your first try could drag on for years. After all that, the average Social Security benefit is just a little over $1,000.
Compared to LTDI, the most cost-effective option if you want financial protection, SSDI falls short. Long-term disability insurance not only fully (or almost fully) covers your lost income, it’s also far easier to qualify for.
LTDI vs. SSDI: Quick comparison
|Long-term disability insurance||Social Security disability insurance|
|Benefit period||Two, five, 10 years, or until retirement||As long as you're disabled|
|Elimination period||30 to 720 days; recommended 90 days||6 months|
|Coverage amount||Up to 60% gross monthly income||Percentage of your income; average $1,154.07/month|
|Average cost||1% to 3% of annual salary||N/A|
|Where to buy||Private policies available from insurers; employer-sponsored||Provided by the U.S. government|
Cost of long-term disability insurance vs. cost of Social Security disability insurance
Whether you want long-term disability insurance or Social Security disability insurance may hinge on the cost to you. You purchase long-term disability insurance with premiums, monthly or annual charges that are calculated based on such variables as your coverage needs, medical history, and benefits period length. On average, premiums cost about 1% to 3% of your income. Short-term disability insurance, because it’s frequently a group policy, may be cheaper.
By contrast, Social Security disability insurance is free to you, just like other government-sponsored benefits programs. If you can’t afford disability insurance premiums, SSDI may be your only option.
But if you can afford disability insurance premiums, consider taking out private coverage rather than relying on SSDI. Besides the high probability of being rejected for benefits, even those who are eligible for SSDI often wait many months to receive coverage.
If your Social Security disability claim is approved, you will receive back pay for the time you spent appealing the SSA’s original decision. But that doesn’t help you with the bills and expenses you had during the time you spent hoping to receive disability benefits.
And if the result of your Social Security disability benefits claim is a denial, you won’t have any other options for coverage. Long-term disability insurance insurers won’t cover you if you’re already disabled.
Your benefits could be taxed under both SSDI and LTDI coverage. For SSDI, your benefits will be taxed only if you earn income on top of your SSDI benefits; the threshold for single people is between $25,000 and up, and $32,000 and up for people who are married filing jointly.
For LTDI, your benefits will be taxed if any part of your premiums were paid for with pretax dollars, such as if your employer subsidizes part of your policy, but only the percentage of benefits equivalent to the percentage that was subsidized is considered taxable income.
Qualifying for long-term disability insurance vs. qualifying for Social Security disability insurance
Long-term disability insurance and Social Security disability insurance differ in another key way: how and when you can get covered under either. You apply for LTDI before you become disabled, so when you need coverage it’s there as long as you’ve been paying your premiums. You apply for SSDI after you become disabled.
Because SSDI is part of the larger socialized benefits system of the U.S., you technically have the right to claim benefits any time after you meet the SSA’s strict definition of disability and its requirements for employment history.
However, Social Security disability benefits are very difficult to claim. There are several stages in the approval process that determine not only whether you’re disabled, but also whether you may recover or adapt to other types of work. If you’re so disabled that you can’t do your old job, but not so much that you can’t do another, less labor-intensive or mentally taxing one, then you’ll be denied benefits, even if your new job pays you less money. A lawyer who has a limb amputated, for example, won’t be eligible for benefits if he or she can wear a prosthesis or continue doing case research.
Long-term disability insurance benefits are much easier to claim. You’ll mainly run into an issue claiming long-term disability benefits if your disability was caused by a pre-existing condition, which your policy may not cover, or criminal activity such as illicit drug use.
With both SSDI and LTDI, you’ll need to present medical history from your doctor that details your disabling condition in order to prove your eligibility to receive benefits. The Social Security Administration maintains a list of conditions it considers sufficiently severe to automatically receive disability benefits, and other conditions outside of those listed must be equally severe as one on the list. The threshold for severity under LTDI coverage is simply to show that you can’t work.
Benefit period of long-term disability insurance vs. benefit period of Social Security disability insurance
With long-term disability insurance, you’ll receive benefits when you become disabled for as long as the disability lasts, minus an initial waiting period (or “elimination period”) of about 90 days, for up to the defined benefit period. The benefit period could last just a couple of years, or it could last until retirement. The longer the benefit period, the higher your premiums will be.
There is no benefit period under Social Security disability insurance. You’ll continue receiving benefits payments until your disability improves or you’re able to return to work. The SSA will periodically review your case, even taking into consideration advances in medical technology that may render your disability less severe. If your disability lasts until retirement age, the SSA will automatically convert your SSDI benefits to traditional retirement benefits.
How Social Security disability insurance can complement long-term disability insurance
If you purchase a long-term disability insurance policy, you may choose to add a social benefits offset rider to the policy. A rider is additional coverage you can add to a policy that enhances or increases your benefits. The social benefits offset rider allows SSDI to complement your LTDI coverage.
The way it works is that you pay lower premiums on your LTDI policy in the expectation that, if you become disabled, you’ll apply for SSDI coverage and receive benefits from the U.S. government that offset the amount the insurance company has to pay. If your LTDI coverage is for $4,000 per month, but the SSA pays you $1,000 per month, the carrier only has to pay $3,000 per month.
Using the above example, if your LTDI policy has a social benefits offset rider but your Social Security benefits claim is rejected, you’ll still receive the full $4,000 per month in benefits — it will just come solely from LTDI company.
How Social Security disability insurance can be superior to long-term disability insurance
If you become disabled, we recommend applying for Social Security disability insurance benefits even if you’re already eligible to receive private long-term disability insurance benefits. Since SSDI doesn’t cost you anything, you lose nothing by applying except the time it takes you get approved.
Social Security disability insurance also comes with an amazing advantage if you need healthcare. After 24 months of receiving SSDI benefits, regardless of your age, you become eligible to receive Medicare, the U.S. government’s single-payer health care program that is usually only open to retirees. Medicare allows recipients to receive health care at a heavily subsidized and reduced cost or for no cost at all.
If you’re disabled, you can also claim Social Security disability benefits for your children. As long as your child is unmarried, younger than age 18 (or a full-time student up to age 19), or younger than 22 but also disabled, he or she can receive benefits from the Social Security Administration. The Social Security disability benefits that a child can receive are calculated as a percentage of the parents’ disability benefit, up to a family maximum payment of between 150% and 180% of the parents’ full benefit amount.