Learn more about long-term, short-term, and Social Security disability insurance, and how each can protect your income.
When building a financial safety net, many people look to protect against the unknown with life insurance and health insurance. But your ability to earn income is your greatest asset and is crucial to any financial plan; if you’re unable to work, how do you plan for the future or meet your immediate needs, like paying bills?
Disability insurance can help. It’s income protection that keeps money coming in when you can’t work due to illness or injury. Disability insurance comes in long-term, and short-term versions, and the Social Security Administration also provides disability insurance. Long-term disability insurance is often the most overlooked. Read on to learn about:
|Short-term disability insurance||Long-term disability insurance||Social Security disability insurance|
|Benefit period||3-6 months||2, 5, 10 years, or until retirement||As long as you're disabled|
|Elimination period||Less than 14 days||30-720 days; recommended 90 days||6 months|
|Coverage amount||Up to 80% gross monthly income||Up to 60% gross monthly income||Percentage of your income; average $1,197/month|
|Average cost||1-3% of annual salary||1-3% of annual salary||N/A|
|Where to buy||Typically employer-sponsored||Private policies available from carriers; employer-sponsored||Provided by the U.S. government|
Disability insurance is like insurance for your paycheck. When you’re unable to work, disability insurance can replace your income stream to make sure you can put food on the table, your basic necessities are met, and you can maintain your lifestyle so it never changes in any unforeseeable circumstances. The benefit payment from a private policy is tax-free (employer plans may be taxed) and pays out for a certain period of time, as outlined in your policy.
The type of disability insurance you have determines some of the different guidelines and features, like how long the policy will pay. In general, here’s what you need to know about how disability benefits are determined:
Note that disability insurance is different than workers’ compensation. Workers’ comp only covers an injury or illness incurred at work. Most disabilities happen off the job and therefore wouldn’t be covered by workers’ comp.
Disability insurance comes in different forms. Each type provides essentially the same service – a monthly benefit when you’re unable to work – but there are differences that determine:
Long-term disability insurance can be offered through an employer as group coverage, but more comprehensive plans are privately purchased from an insurance company. Long-term insurance can last two, five, or 10 years, or until retirement. It usually costs around three percent of your annual income.
Long-term disability is the best type of disability insurance for most people. It lasts longer than short-term disability insurance; it is easier to qualify for and provides a larger benefit than Social Security disability insurance.
Learn more about long-term disability insurance.
Short-term disability insurance policies are typically gotten through an employer as a free or low-cost benefit. It can be purchased separately but is usually prohibitively expensive; it’s around the same cost as a long-term policy despite the difference in benefit periods.
Short-term disability benefits have a maximum length of around a year and provide up to 80% income replacement. Your short-term disability insurance must expire before your long-term disability insurance kicks in.
Learn more about short-term disability insurance.
Social Security disability insurance (SSDI) is provided by the federal government through the Social Security Administration. While many people under the age of 65 qualify for SSDI benefits, it’s not ideal for people to rely on it.
SSDI is notoriously difficult to qualify for; nearly 65% of initial claims are denied because there is a very strict definition of disability (must be totally disabled, compared to partial or occupational definitions), and even if you do qualify (or successfully appeal a denial) it can take nearly two years to start receiving benefits. Plus, many people won’t be able to cover all of their needs with SSDI: The average monthly payment is under $1,200, and it may be taxed.
Overall, most people will be better served with a short-term disability policy through their employer and a private long-term policy for big-picture financial protection.
Learn more about Social Security disability insurance.
In addition to the commonly available disability plans above, some states offer their own disability insurance programs. Each state has different details concerning benefits and qualifications. The states that currently offer disability benefits are:
State disability plans must be acquired through a state department and cannot be purchased from an insurance agent or broker.
According to the Council for Disability Awareness, 1 in 4 workers will become disabled before they retire. Coupled with the fact that the average disability outlasts short-term policies, and how difficult it is to qualify for SSDI, long-term disability insurance makes sense as part of a financial safety net. Without it, workers run the risk of falling behind in their long-term goals, depleting their savings, and not being able to keep up with their day-to-day expenses.
Disclaimer: Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.