The Beginner's Guide to Disability Insurance

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Written by: Guest | Best Company Editorial Team

Last Updated: September 11th, 2020

Guest Post by Jack Wolstenholm

Health. Life. Home. Auto.

When it comes to your insurance needs, these types of coverage are probably the first that come to mind. And rightfully so. Together, they help protect how you and your loved ones live life.

However, none of these policies will protect your greatest asset — the ability to work and earn a living. After all, it’s your income that empowers you to buy a home and a car, put food on the table, and pay the bills (including all of those monthly insurance premiums). This gap in coverage is one that far too many people experience, oftentimes because they don’t fully understand what their options are. 

So, what is the best way to protect your income? That’s exactly what disability insurance, the focus of this simple, straightforward guide, is designed to do.

Understanding how disability insurance policies work

Disability insurance is insurance for your paycheck. If you experience a covered disabling event, your insurance company will pay you a monthly benefit to replace a portion of the income you lose from not being able to work. That’s why it often helps to think of disability insurance as income protection.

Every disability insurance policy includes the following components:

  • The premium amount is how much you pay to the insurance company for coverage, depending on a number of personal factors and policy choices. Typically, premiums are paid on a monthly basis. 
  • The benefit amount is how much your disability insurance policy will pay you in benefits if you experience a covered disability. The higher your benefit amount is, the more you will pay in premiums. 
  • The benefit period is how long benefits from a disability policy will last if you experience a covered disability event. The longer your benefit period is, the more you will pay in premiums.
  • The elimination period (or waiting period) is how long you must wait after a disability occurs before benefits kick in. The shorter your elimination period is, the more you will pay in premiums. 
  • The definition of disability states what is and what isn’t a covered disability based on how it impacts your ability to work. The more comprehensive your policy’s definition of disability is, the more you will pay in premiums.

As you can see, the policy choices you make impact the cost of disability insurance greatly. But how much you pay for coverage also depends on a number of personal factors, including your age, gender, health history, and job occupation. That’s why it’s smart to put a policy in place when you are young, healthy, and employed.

The different types of disability insurance, explained

Insurance can quickly get confusing and, unfortunately, disability insurance is no exception. Let’s take a closer look at the main types of disability insurance coverage you should understand.

Individual disability insurance vs. group disability insurance

Individual disability insurance is personal coverage you can purchase on your own through a private insurance company. When you buy an individual disability policy, you are responsible for making payments on-time to keep your coverage in-force. Your individual policy is portable, which means it will stick with you as you change employers throughout your career.

Group disability insurance is coverage that can be purchased by an employer, association, or organization on behalf of a number of individuals. When you join a group disability insurance plan through work (the most common scenario), your employer will typically pick up most, if not all, of the cost. 

While affordable group coverage is an employee benefit you cannot afford to pass up, it doesn’t mean rule out the need for individual coverage. For one, participation in a group plan is contingent upon membership. This means if you leave your employer, you lose your coverage. (Technically, your employer can cancel the plan without your consent at any time, too.)

Furthermore, group disability plans use your base salary to determine your benefit amount. This excludes any commissions and bonuses you earn, and any benefits you receive will be taxed. Group disability insurance plans also place a cap on benefits at a certain dollar amount, raising concerns for high-income earners.

With individual disability insurance, you can secure a higher benefit amount that better reflects your total net income. Better yet, any benefits you receive will not be taxed since the premiums are paid with after-tax dollars.

Long-term disability insurance vs. short-term disability insurance

Every individual and group disability insurance plan offers coverage that is either long-term or short-term in nature.

As its name suggests, long-term disability insurance covers serious injuries and illnesses that last several months, years, or even permanently. Benefit periods may last one, two, five, or 10 years; or until age 65 or 67. Elimination periods may last 30, 60, 90, 180, or 365 days.

On the other hand, short-term disability insurance covers temporary conditions that most people are generally able to quickly recover from and return to work. Benefits may kick in after an elimination period of seven, 14, or 30 days, and last for a period of three, six, or 12 months.

While short-term coverage may be cheaper than long-term coverage upfront, that’s because it pales in comparison to the protection that long-term coverage provides. The right long-term disability insurance policy will replace a greater portion of your income for a wider range of disabilities and, of course, for a longer period of time.

Do I truly need disability insurance coverage?

No one wants to add another monthly expense to their budget — especially if it’s something you may never even need to use. While this logic works for many things, like extra TV streaming subscriptions and neglected gym memberships, it doesn’t for disability insurance. 

Here’s why:

  • The chances of becoming disabled are higher than you may think. According to the Social Security Administration, approximately 25 percent of American workers will experience a disabling event at some point in their careers that prevents them from working for at least one year. If that seems high, it’s probably because what constitutes a disability is often misunderstood as well.
  • Sudden accidents happen, but they only account for a small percentage of disabling events. The Council for Disability Awareness reports that over 90 percent of claims for long-term disability insurance benefits result from serious conditions that develop over time. These include medical illnesses, such as cancer and heart disease, and musculoskeletal disorders, such as arthritis and back pain.
  • Knowing this, ask yourself: How long could you last without a paycheck? If you’re not all that confident in your answer, just know you’re not alone. As the global COVID-19 pandemic began its tear across the United States in March, GOBankingsRates conducted a survey that discovered nearly 50 percent of Americans didn’t have enough emergency savings to last longer than three weeks.

It’s always smart to be proactive with your finances, but especially in uncertain times like these. Set aside some time today to evaluate your disability insurance needs and protect your greatest asset — your income.

Top Disability Insurance Companies

See BestCompany.com's top-ranked companies, including Breeze, and learn more by reading customer reviews.

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Jack Wolstenholm is the head of content for Breeze, a disability insurance platform that offers personalized quotes and policy recommendations online.

The Top Disability Insurance Companies

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#1 Northwestern Mutual chevron_right
9.9 Overall Score
4.4
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(11)
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#2 Breeze chevron_right
8.5 Overall Score
5
starstarstarstarstar
(10)
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#3 Cigna chevron_right
7.2 Overall Score
3.4
starstarstarstar_halfstar_border
(10)