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If you become too ill or disabled to work, disability insurance offers regular benefits so you don’t have to go without an income. There are several types of disability insurance — some provided by your employer, some you purchase independently — and they all offer slightly different coverage and benefits for different situations.
However, long-term disability insurance is generally the best type of disability insurance for most people because it is the most cost-effective and offers the most comprehensive coverage.
Long-term disability insurance provides the most robust coverage if you become disabled
Employer-sponsored disability plans, such as short-term disability insurance, are good supplements to a long-term disability plan
Other types of disability insurance can complement your individual disability plan, but do not offer enough coverage on their own
Long-term disability insurance pays out monthly benefits if you become too ill or disabled to work. The benefit period can last two, five, or 10 years, or even until retirement, and the monthly benefit is up to 60% of your gross monthly income. It generally costs about 1% to 3% of your salary.
According to Policygenius data, the average length of a long-term disability for someone in their 30s is a little under three years. Because of this, long-term disability insurance will provide the most robust protection if you become disabled when compared to other disability insurance plans that pay out benefits for a shorter period of time.
Types of long-term disability insurance policies
There are two types of long-term disability insurance policies:
Any occupation disability insurance only provides benefits if you can’t work any job that you’re reasonably suited for because of illness or injury. This is much harder to prove and it’s harder to receive a benefit, but it’s also generally less expensive than own-occupation disability insurance. For individuals in high-paying occupations, this means you'll lose a significant amount of income if you can still work a lower paying job.
Own-occupation disability insurance defines a disability as an inability to work at your regular occupation and will pay out even if you can work another job.
There are also three kinds of own-occupation disability insurance policies that you can get:
True own-occupation: If you can’t work in your own occupation due to injury or illness, you get benefits — even if you start working a different job.
Transitional own-occupation: If you can’t work in your own occupation due to injury or illness and you get a new job that provides a lower salary, you get benefits to make up the difference between your new (lower) and old (higher) salaries.
Own-occupation, not engaged: If you can’t work in your own occupation and you haven’t started a new job, you get benefits. Once you choose to start a new job, no matter what field, you stop receiving benefits from your disability insurance policy.
Like long-term disability insurance, short-term disability insurance replaces up to 60% of your pre-tax income if you can’t work due to an illness or injury. The difference, however, is that coverage only lasts for a short period of time — up to one full year.
Short-term disability policies are often offered by your employer, and some states even require that employers provide short-term disability coverage. Five states and Puerto Rico even have their own state disability insurance programs.
Because the average disability time is about three years, short-term disability insurance policies shouldn’t be bought in lieu of a long-term disability plan. Instead, they are a good supplement to long-term policies because they have a drastically shorter elimination period that can be just a few days. You can use a short-term policy to cover living expenses while you wait for your long-term policy to become active.
Short-term policies are also the same cost as long-term disability policies — about 1 to 3% of your gross income — but because coverage isn’t as comprehensive, it’s not a very cost-effective choice.
Long-term disability is the best type of disability insurance for most people.
Let our experts help you find the perfect income protection policy.
Mortgage disability insurance — also known as mortgage payment protection insurance — is a type of long-term disability insurance that specifically covers your mortgage payments if you can’t work due to an illness or injury.
Mortgage disability insurance can be purchased from your mortgage lender, an insurance agency, or a broker, and doesn’t require the typical underwriting process or medical exam that other long-term disability insurance policies ask for. It’s a good alternative if you don’t qualify for regular long-term disability coverage but don’t want to risk defaulting on your mortgage.
Supplemental disability insurance closes the gap between the benefits paid by employer-sponsored disability plans (which can be taxed or capped), and the full amount of money you’ll need to cover your expenses in case you can’t work.
Social security disability insurance (SSDI) is a federal program that provides payouts to some disabled U.S. workers and families — but only after a drawn-out application process that can take three to five months. Over 60% of applications are denied at the first application level and the average payout is just over $1,000 a month, so it’s not worth relying on. Most people are better off with a private disability policy.
State disability insurance
Some states offer their own short-term disability insurance plans that either employers pay for, employees pay for through payroll deductions, or a mix of both. The following states (and U.S. territory) offer state disability insurance:
You cannot purchase state insurance benefits through an agent or broker, and benefits aren’t generally payable for more than one year. California, for example, will pay 60 to 70% of wages for up to 52 weeks; New York’s plan covers 50% of gross wages up to 26 weeks.
Because state disability insurance benefits are short-term, you’ll get the most protection by purchasing a long-term disability insurance policy even if you have state disability insurance.disability overhead expense insurance
Disability overhead expense insurance is a type of disability insurance specifically for business owners that will pay for a business’ overhead — including rent, utilities, employee salaries, payroll taxes, postage, accounting fees, and more — if you become ill or disabled and can’t run your business.
Disability overhead expense insurance needs to be bought in addition to a long-term disability policy, as it will not cover the loss of your own salary and expenses.
Workers’ compensation, also known as workers comp, is a type of insurance that your employer is required to have in every state that pays out if you become injured at work. Many people assume that workers comp is a substitute for disability insurance — nope! Workers’ comp does pay out a monthly benefit in the event an employee cannot work, but only if the employee’s injury happened at work.
One alternative to disability insurance is "self-insurance". “Self-insurance” is a misnomer. It’s not actually insurance, it’s just savings. Some people forgo use savings to replace their income in the event of an illness or disability, but this risks depleting funds you’ll need in the future.
About 61% of adults don’t have enough money saved to cover an emergency, so for most people this is not an option.
The two main types of disability insurance policies are short-term disability insurance and long-term disability insurance. Short-term disability insurance only pays out for under a year, while long-term disability insurance can pay for many years or even decades.
Long-term disability insurance is the best type of disability plan to buy because it is the most cost-effective. It costs as much as a short-term disability insurance plan, but provides far more coverage. Additionally, alternatives to long-term disability insurance don’t pay enough to suit most people's needs.
Each insurer treats each applicant differently, and working with an insurance broker is the best way to find the company that will provide the best disability policy for your background.