Q

What is disability insurance?

A

Disability insurance is coverage that replaces about 60% of your monthly pre-tax income should you become unable to work due to an illness or injury.

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Rebecca Shoenthal

Rebecca Shoenthal

Licensed Insurance Expert

Rebecca Shoenthal is an insurance editor and licensed Life, Health, and Disability agent at Policygenius in New York City. Previously, she worked as a nonfiction book editor. She has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.

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Anthony He

Anthony He

Disability Insurance Operations Manager

Anthony He is a disability insurance expert and the Operations Manager at Policygenius. He has 10 years of previous insurance experience and is a licensed agent in the state of New York.

Updated July 12, 2021|7 min read

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Disability insurance (DI) is a form of income protection that pays you a portion of your monthly pre-tax income if you can’t work because of an illness or injury. The level of income replacement that a plan offers and how long you get payments varies by type of disability insurance.

There are three types of disability insurance: short-term disability insurance (STDI), which is tied to your employer, pays up to 60% of your gross monthly income, and lasts three to 12 months; long-term disability insurance (LTD), which also pays up to 60% of your gross monthly income and lasts two years up until retirement; and Social Security disability insurance (SSDI), a free form of federally-sponsored disability insurance that only covers individuals with a severe disability and is notoriously difficult to qualify for. 

A private disability insurance policy is an often overlooked tool for building a financial safety net, but it can fill the coverage gaps left by health health insurance plans and life insurance policies. Even if you have short-term coverage from an employer, consider combining it with a long-term policy for more complete coverage.

Key Takeaways

  • Disability insurance replaces about 60% of your income for a set period of time if you’re unable to work

  • An illness, injury, or other condition  that prevents you working qualifies as a disability

  • Short-term disability insurance provided by employers doesn’t offer enough coverage and you lose coverage if you leave your employer

  • The benefit payment from an individual policy is tax-free, but benefits from an employer plan may be taxed

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How does disability insurance work?

When you’re unable to perform your normal job duties because of an injury, illness, or other condition — whether or not it’s permanent — disability insurance replaces a certain percentage of your gross monthly income. It won’t completely replace your pay, but it provides enough so you can afford food and other necessities without drastically changing your lifestyle.

Like other insurance policies, you pay a monthly premium to keep your disability insurance policy active. If something happens and you cannot work, you file a claim with the insurance company so you can receive a monthly payment, called a benefit amount. The benefit amount varies by type of plan, but it is generally 60% of your gross monthly pay. Benefits will pay out for a certain length of time, called a benefit period. Your benefit period depends on the type of plan you have.

Before you can apply for benefits, you have to go through the policy’s elimination period, also called the waiting period. The elimination period for a short-term disability is typically one or two weeks, and the most common elimination period for a long-term disability is 90 days. Policies with shorter elimination periods are typically more expensive and have higher monthly premiums. Less-expensive policies have longer waiting periods.

Are disability insurance benefits taxable income?

Benefit payments from private disability insurance plans are usually tax-free. You may have to pay tax on benefits from an employer-sponsored policy. 

→ See if your disability benefits are taxable.

Disability insurance vs. workers’ compensation

Workers’ compensation is covered entirely by your employer. Unlike disability insurance, you don’t need to pay anything for workers’ comp. However, there are two important reasons to consider disability insurance in addition to workers’ comp.

Disability policies cover you regardless of where or how you sustain an injury (as long as you meet the policy’s definition of disability) but workers’ compensation only covers work-related injuries and illnesses.

Most disabilities happen off the job and therefore wouldn’t be covered by workers’ comp. For example, disability insurance would cover injuries from a car crash if they keep you out of work, but workers’ comp would not cover you unless the accident happened on the job.

If you sustain an injury at work and receive workers’ compensation, your private disability insurance benefits could be reduced by the amount you receive from workers’ comp.

→ Read our state-by-state guide to workers’ compensation

Disability insurance riders

Disability insurance riders are optional add-ons that allow you to customize a policy to meet your specific income needs. Adding a rider may increase your monthly premiums, but it allows you to increase your benefit payment in certain circumstances. The following are common types of disability insurance riders:

  • Cost of living adjustment (COLA): Adjusts the value of your monthly benefit based on inflation

  • Future increase option (FIO): Allows you to increase your monthly benefit in the future if your income increases, but your premiums will also increase

  • Automatic benefit enhancement (ABE): Automatically increases your benefit each year, for a certain number of years, based on common income increases that a healthy individual can expect

  • Partial or residual disability benefits: Your policy will continue to pay partial benefits after you go back to work if you’ve lost earning power because of your disability

  • Catastrophic Disability Benefit (CAT): Pays an additional monthly benefit if the insured is catastrophically disabled and needs assistance to perform daily living activities

→ Learn more about what disability insurance riders to add to your policy.

What qualifies as a disability?

All disability insurance policies include a definition of disability, which explains the conditions you must meet in order to qualify for a benefit payment under your specific plan. In general, an injury or illness will qualify you for disability insurance benefits if you are either mentally or physically unable to complete your job, or if you have an impairment that substantially limits your ability to carry out basic life activities.

If you have to self-isolate because of the coronavirus (COVID-19) and you cannot work, you could qualify for disability insurance benefits. 

→ Learn more about disability insurance and coronavirus.

Disability insurance exclusions

Disability insurance policies come with exclusions that are not included in your coverage. Exclusion riders vary by your pre-existing conditions when you apply. You cannot receive benefits from an excluded condition or from any future conditions that result from an exclusion. The policy will still pay out normally for other illnesses and injuries. All disability insurance companies treat exclusions the same way and they do not vary by insurer. 

→ Learn more about disability insurance with a pre-existing condition.

The types of disability insurance

There are three main kinds of disability insurance: short-term disability insurance , long-term disability insurance, and Social Security Disability Insurance. Each type of disability insurance provides essentially the same service, but there are differences in the cost of a policy, the benefit period, and where you can apply for a policy. Certain states also offer their own disability benefits.

SHORT-TERM DISABILITY INSURANCELONG-TERM DISABILITY INSURANCESOCIAL SECURITY DISABILITY INSURANCE
Benefit period3-12 months2, 5, 10 years, or until retirementAs long as you're disabled
Elimination period7 days or more30-720 days; recommended 90 daysUp to 6 months
Coverage amountUp to 60% gross monthly incomeUp to 60% gross monthly incomePercentage of your income; average $1,258/month
Average costOften included gratis, but sometimes 1%-3% of annual salary1%-3% of annual salaryFree
Where to buyTypically employer-sponsoredIndividual policies available from carriers; employer-sponsoredProvided by the U.S. government

Methodology: Information based on Policygenius data from July 2021.

Short-term disability insurance

Employers typically offer short-term disability benefits to employees for free or at a low cost. You can purchase a policy separately, but for around the same cost, we recommend purchasing a long-term policy for more coverage.

Short-term disability has a waiting period of one or two weeks, and it provides income replacement of up to 60%. Benefits usually last three to six months with a maximum length of one year. If you ever suffer a long-term disability, a short-term policy will usually expire before a long-term plan kicks in.

Some employers provide a short-term disability group plan in place of a maternity leave policy. 

→ Learn more about short-term disability insurance.

Long-term disability insurance

Long-term disability insurance may be offered through your employer as group coverage, but employer-sponsored plans don’t offer much coverage. More comprehensive plans are available for purchase independently from an insurance company. Long-term disability benefits can last two years, five years, 10 years, or even until retirement. A policy usually costs about 1% to 3% of your annual income.

Long-term disability insurance may be better for most people than short-term disability insurance. Benefit payments last longer than short-term disability insurance, it’s easier to qualify for benefits, and a policy provides larger benefits than Social Security disability insurance.

→ Learn more about long-term disability insurance.

Social Security Disability Insurance

Social Security Disability Insurance is provided by the federal government through the Social Security Administration (SSA). You are only eligible if you have paid Social Security tax for a certain length of time, but it can be difficult to qualify for Social Security disability insurance benefits.

Social Security disability insurance has a very strict definition of disability — you must meet the requirements for  total disability (as opposed to a partial or an occupational disability). According to the SSA, more than 70% of all disability claims were denied in 2017, and that number has only been increasing over the last several years [1] . Even if you do qualify, it can take nearly two years before you start receiving benefits. 

Social Security disability insurance also doesn’t offer enough coverage for most people — the average monthly SSDI payment is 1,146.79 [2] . If your total income is more than $25,000 for the year, you will also have to pay taxes on your benefits. The taxes owed increase depending on your income level [3]

Overall, Social Security disability insurance is only a safe bet if you can’t afford long-term disability insurance.

Temporary disability insurance

Some states offer their own disability insurance programs, called temporary disability insurance (TDI). These short-term programs are only available through the state, and they’re available in addition to the types of disability insurance explained earlier.

Five states currently offer temporary disability benefits:

  • California

  • Hawaii

  • New Jersey

  • New York

  • Rhode Island

Puerto Rico also offers TDI.

Should you get disability insurance?

Even if you have a short-term policy through your employer, pairing it with a private long-term disability policy will offer the most comprehensive financial protection.

A 20-year-old worker has a 1 in 4 chance of becoming disabled, for at least one year, by the time they reach retirement age, according to data from the Social Security Administration [4] . Illness is a more common cause of disability than injury, and illnesses aren’t limited to people with labor-intensive jobs. Losing your income for months — in addition to possible medical bills — is more than most Americans can handle without going into debt.

Because of how difficult it is to qualify for Social Security disability insurance, everyone should consider getting disability insurance if they can afford it. In particular, higher-income earners often have a higher standard of living and their lifestyles would be greatly impacted if they lost income for just a couple of months. 

Frequently asked questions

How does disability insurance work?

If you become ill or injured and cannot work, a disability insurance policy will pay you a portion of your pre-tax earnings until you can return to work.

What is covered by disability insurance?

Most disability insurance covers total disability and rehabilitation, though what is actually covered will depend on your policy. Some policies also cover partial disability and presumptive disability. Accidental injuries and illnesses, such as cancer, cardiovascular disease, and muscle disorders are covered by disability insurance.

Who needs disability insurance?

Anyone who would not be able to maintain their lifestyle if a disability prohibited them from working should get coverage.Those with outstanding debts and financial dependents are also good candidates for private disability insurance.