Disability Insurance Guide

If you became disabled, would you be able to continue paying your bills?
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Disability Insurance Guide

Written by Brian Greenberg
CEO / Founder & Licensed Insurance Agent

Last updated: November 29th, 2022

Reviewed by Paige Geisler
Licensed Insurance Agent

Most people assume they won’t need disability insurance, but 25% of Americans can expect to become disabled before they reach retirement age. Only 40% have the resources to survive 3 months without income.

The ability to support yourself and your family is one of your most valuable personal assets. Having a way to pay your bills in the event of a disability can provide incredible peace of mind as well as the safety net you need if, for any reason, you’re suddenly unable to work.

Disability insurance is that safety net for millions of people. Without it, everything you’ve worked for could be at risk. This guide walks you through what disability insurance is, how it works and what options you have to put disability insurance in place for your own protection.

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What Is Disability Insurance?

Disability insurance is a type of insurance plan that pays benefits if you’re unable to work due to injury or illness. Several types of disability insurance are available, and the specifics of each policy determine how much you might receive in benefits and how long the benefits will last.

Many people assume that if they’re injured, they’ll be compensated by workers’ compensation or Social Security benefits. However, workers’ compensation only applies in very specific circumstances, essentially injury on the job. Social Security disability benefits are very limited and difficult to qualify for; they typically don’t pay enough to keep you going after an injury or illness.

Disability insurance, on the other hand, typically pays about 45–65% of your income when you can’t continue earning an income in your occupation. When you pay for disability insurance with after-tax dollars, those benefits are tax-free and go further than you might expect.

Disability insurance policies can vary greatly in their definition of what it means to be “disabled.” Some policies pay if you can’t work in your existing occupation, while others pay only if you’re completely unable to work. Many disability insurance policies cap the amount of benefits they will pay over your lifetime.

While some people have disability insurance through their employers, they may be underinsured without realizing it. Without disability insurance income, an injury or illness that leaves you unable to work could destroy your savings and assets, creating a financial catastrophe for yourself and your family.

How Does Disability Insurance Work?

When you have disability insurance, you or your employer pays a monthly premium for the insurance policy. If you become disabled, you make a claim against that policy.

For your claim to be approved, you must meet the policy’s definition of disability. This definition varies from one insurer to another and from one policy to another. Some disability policies cover disabilities resulting from injuries but not those resulting from illness, and some may not cover mental health-related disabilities. Some policies cover partial disability — they pay partial benefits if you’re able to work part-time but not full-time — while others only cover disabilities that keep you from working at all. It’s important to understand the definition of disability in any insurance policy you’re considering.

Disability insurance pays benefits regularly; you receive a check or a direct deposit into your bank account just as if you were receiving a paycheck. Your policy contains a waiting period (typically several months for a long-term policy), and your benefits start after that period is over. Typically, benefits stop when you return to work, when you’re no longer disabled, when you reach retirement age, or when you’ve reached the financial or time cap on the policy.

What Are the Different Types of Disability Insurance?

Disability insurance comes in one of two types: short-term insurance and long-term insurance. Short-term insurance typically covers disabilities that keep you from working for a year or less. In contrast, long-term disability insurance lasts for a defined number of years, when you’ve received a predetermined monetary amount, reach retirement age, or until the disability goes away. Some long-term policies may also pay for training to return to the workforce in another capacity. For instance, if a construction worker becomes disabled and can no longer perform physical labor, these policies might retrain them to work at a desk job.

Disability insurance comes from two major sources: employer-sponsored group disability insurance plans and private disability insurance policies. Employers pay for all or part of the former, while you are responsible for choosing and paying for any private individual insurance. There are a few other sources of disability income, including:

  • Social Security Disability Insurance. SSDI is run by the Social Security Administration. Benefits are based on the amount you’ve paid into the system through payroll deductions.
  • Supplemental Security Income. Also administered by the Social Security Administration, SSI is only for very low-income disabled, blind, and elderly people.
  • Veterans Disability. This program, run by the Department of Veterans Affairs, pays tax-free benefits to military veterans whose illness or injury results from active military service. Some post-service disabilities are also covered.
  • Black lung disability benefits. Special programs pay benefits to miners who have incurred disabilities related to black lung.
  • Union disability coverage. Some unions offer disability benefits over and above any employer-sponsored benefits a worker might be eligible for.
  • Automobile insurance coverage. If your disability results from an auto accident, the at-fault driver’s insurance may provide disability benefits.

Long-Term Disability Insurance

Long-term disability insurance provides benefits for a period lasting at least several years, and many policies pay out for the duration of the insured person’s working life. Policies tend to pay 40-60% of the worker’s base salary, though they may end at retirement age. You should expect to wait 90 days after the disability has been confirmed for the policy to kick in and start making payments.

Specialized long-term policies are available for professionals who might lose their careers if they’re injured. For example, a surgeon might purchase a long-term disability policy that provides benefits if their hands are injured, or an opera singer might similarly insure against the loss of their voice.

Short-Term Disability Insurance

If you’re unable to work temporarily due to an illness or injury, you may receive benefits from short-term disability insurance — and in some cases, this insurance also covers recovery from childbirth. Benefits can last anywhere from a few weeks or months to a full year. The waiting period tends to be very short, so you could start receiving benefits within a few days of your disability and certainly no longer than a month. You can expect to receive 60-70% of your base salary from short-term disability insurance.

Disability Insurance through Employers

Many people get their disability insurance through their employers, unions, or professional associations. Often, these policies are less pricey than a plan you might purchase on your own. If you receive benefits, though, they’re typically taxable. If you leave your company, you risk losing your insurance, though some policies may be portable.

People with pre-existing health conditions and older people may find that being on their employer’s group disability policy is the easiest way to qualify for disability insurance. Sometimes employers offer disability insurance as a benefit but only pay part of the premium. Price-wise, this can still be a good deal, and since your share of the premium is deducted from your paycheck, you probably won’t notice it.

Disability Insurance for Individuals

If you can’t get disability insurance from your employer, you should look into purchasing an individual policy. While you’re responsible for paying 100% of the premiums, you have much more freedom when you buy your own disability insurance.

You can customize the policy to provide the coverage you need — for instance, you could plan for automatic cost-of-living adjustments. You can also work with any insurance company you choose. In addition, you don’t have to worry about losing it if you change jobs.

If you have disability insurance through your employer, you may still want to consider purchasing your own disability insurance as well. Your employer’s policy may not provide the coverage you need. Especially if a good percentage of your income comes from commissions or bonuses, you may want extra coverage since 60% or less of your base salary may not cover your needs. As an added bonus, any benefits you receive are tax-free when you purchase your own coverage.

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Disability Insurance for the Self-Employed

If you’re self-employed, you don’t have an external employer to provide disability insurance for you. In this case, you should look into individual coverage. Disability insurance becomes especially important if you have a growing family or have just purchased a home or business. You can choose from a wide range of individual policies that offer all the benefits listed above.

What Do Disability Benefits Cover?

Disability benefits are based on your base salary, paying anywhere from 40-70%, depending on the type of insurance. You can use the disability benefits in any way you like. Most people use them to pay their bills and cover everyday expenses while unable to earn an income.

If you’re receiving long-term disability benefits, you’re unlikely to have to pay taxes on them. Short-term disability benefits, however, are typically taxed.

Do Disability Insurance Benefits Vary From State to State?

Some states do require employers to provide temporary or short-term disability benefits. In Hawaii, New Jersey, New York, and Puerto Rico, employers must provide 26 weeks of short-term disability. Rhode Island requires 30 weeks of short-term disability coverage; in California, coverage is for a full year.

No state requires employers to provide long-term disability insurance to employees, though many do, sometimes without asking employees to contribute to the premiums.

How Much Does Disability Insurance Cost?

In general, disability insurance will cost about 1–3% of your yearly salary. This number can vary, however, based on many factors. Some insurance companies offer more attractive rates than others. Other factors that affect the actual cost of your policy include:

  • Your age. The older you are, the more you can expect to pay for disability insurance
  • Your health. You will likely be charged more for disability insurance if you have pre-existing health conditions.
  • Your history as a smoker. If you smoke, expect to pay more
  • The policy’s definition of “disability.” A policy that defines “disability” very narrowly will charge lower premiums than one that uses a broad definition.
  • The length of benefits. The longer the policy is required to pay benefits, the more that policy will cost.
  • The amount of benefits. The more money you’re eligible to receive, the higher the premiums on the policy will be. Expect a slight increase in premium if the policy includes cost-of-living adjustments to benefit amounts.
  • Your occupation. Jobs with a higher risk of injury or illness will result in higher costs for disability insurance.
  • The length of the “waiting period.” You can lower your monthly payment by extending the so-called “elimination period,” which is the length of time you have to wait until benefits kick in.
  • Your gender. Because women typically file more disability claims, they’re likely to pay more in premiums. In addition, women of childbearing age may pay more for short-term disability insurance, which often covers pregnancy-related claims.
  • Your income.If your policy has to pay 40–60% of a high income, you can expect to pay more in premiums than someone who makes less per year.
  • Partial disability rider. If you want to be able to collect some disability benefits while still returning to work part-time, you’ll have to pay extra on your premiums.

How Do You Get Disability Insurance?

If your employer offers disability insurance coverage, sign up for it at work. Your employer will likely pay some or even all of the premiums, making it a good deal. In other cases, employers make the coverage available as a voluntary benefit. You have to pay the premiums, but you will save money because you get the insurance at a group rate. You may also have disability insurance available through your union or professional group.

If you need an individual disability insurance plan, you can seek one through an insurance broker or buy one directly from a company that provides disability insurance. Most individual disability insurance offers long-term coverage, though if you search, you should be able to find some short-term policies.

Applying for individual insurance takes about 4-6 weeks. You should expect to be interviewed about your medical history and take a medical exam. Once approved for coverage, you start paying premiums, and your insurance will be in effect.

What Are The Best Companies for Disability Insurance?

The companies selling long-term disability insurance with the highest combined ratings from the Better Business Bureau and A.M. Best are Guardian/Berkshire, Mass Mutual, Northwestern Mutual, and State Farm.

What Are The Best Companies for Disability Insurance?

SpecificationGuardianMass MutualNorthwestern MutualState Form
Elimination Period30-720 Days60-730 Days90-365 Days30-180 Days
Benefit period2-10 years or up to age 702-10 years or up to age 702-5 years or up to age 705-10 years or up to age 67
Guaranteed renewal?Yes YesYesAvailable via rider
Partial disability covered?Available via riderYesAvailable via riderAvailable via rider (pregnancy not covered)7
Other available riders include:Catastrophic disability benefits, extended benefits option, unemployment waiver, retirement protectionReturn-to-work benefits, short-term disability, extended partial-disability option, student loan payment coverageIndexed income benefit, catastrophic disability benefit, rehabilitation benefitRehabilitation expenses, short-term disability, cost of living adjustment

The actual quotes you get from each company will depend on your age, occupation, and state of health, among the other factors discussed above. Rates can fluctuate significantly from one company to another, and you can expect them to increase as you get older.

For example, a 30-year-old nonsmoking male teacher seeking a monthly benefit of $3,000 could pay premiums of anywhere from $64 to $115 per month, depending on the company chosen. That same teacher at age 50 should expect to pay anywhere from $153 to $310 per month for the same coverage.

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Where Can You Get a Disability Insurance Quote?

The easiest way to get a disability insurance quote is through an insurance agency. Insurance agencies are in a position to compare the policies from many insurance companies and can help you find the coverage that meets your needs.

Most insurance underwriters will also give you quotes on the policies they offer, though a handful (including State Farm) require that you go through an agent to get a quote.

Key Takeaways About Disability Insurance

An injury or illness could cause you to lose months or years of income. As you consider purchasing disability insurance, think about the following issues:

  • How much income you’d need if you couldn’t work
  • How long you could wait for that income stream to begin
  • How long you might need benefits
  • What types of disability would make it impossible for you to work

If you’re unable to sustain your lifestyle and pay your bills without working, you should look into disability insurance. Disability insurance protects your ability to earn an income for your home and family.

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