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You have health insurance to protect you when you're sick, and life insurance to protect your family if you die. But what would happen if you fell ill or were injured and could no longer work? Disability insurance helps replace your income if you become temporarily or permanently disabled and can't work. Some 43% percent of 40-year-olds will face long-term disability by age 65, according to the Insurance Information Institute. Keep reading to learn how disability insurance works, where to get it and whether you need it.
What Is Disability Insurance?
Disability insurance is not the same as workers' compensation. Workers' compensation insurance replaces lost income if you can't work because of a job-related injury or illness. Disability insurance kicks in even if the reason you can't work has nothing to do with your job.
A disability insurance policy provides monthly payments of a portion of your previous income—typically 50% to 70%. Disability policies come in two forms: short term and long term. Short-term policies typically provide benefits for up to two years. Long-term policies may provide benefits for a few years, until retirement age or as long as you live.
Both types of policies have a "waiting period" before benefits begin paying out that begins when you become disabled. Short-term policies generally have waiting periods of zero to 14 days, while long-term policies have longer waiting periods. Often, long-term policies will pay benefits only after a short-term policy has run out.
Many employers provide short- and long-term disability insurance for employees at no cost. This type of coverage typically replaces up to 60% of your income. In some cases, you can even keep the insurance if you leave your job.
Do You Need Disability Insurance?
People in risky occupations aren't the only ones who need disability insurance. In fact, heart disease, cancer, back injuries, anxiety and depression are the most common causes of disability, the National Association of Insurance Commissioners (NAIC) reports.
While just about anyone can benefit from disability insurance, it's especially valuable if:
- Your loved ones depend on your income
- You have a lot of debt (such as a mortgage)
- You have few other financial resources (for example, you're single or your spouse doesn't work)
How Much Does Disability Insurance Cost?
Employer-provided disability insurance is usually paid for by your employer, and you may have an option to buy more coverage through your employer policy. You can also buy an individual disability policy even if you already have an employer policy. Supplementing an employer policy with additional coverage can fill in any coverage gaps.
The cost of disability insurance depends on:
- Your income and the percentage of income you're replacing: Higher incomes and replacement percentages mean higher premiums.
- Your age, gender and overall health: Disability insurance typically costs more for older men in poor health, for example.
- Waiting period: You can save money by choosing a longer waiting period; just make sure you can get by without the benefits during that time.
- Benefit period: A lifetime policy costs more than a policy ending at retirement age, for instance.
Look for the following features, which may be included or available as a rider to your policy:
- Benefits that are indexed to inflation or include a cost-of-living increase
- Residual or partial benefits if you can only work part time
- Coverage whether the disability is due to accident or illness
- A benefit period at least until retirement age
- A waiver of premium (meaning once you're disabled for 90 days, you no longer need to pay premiums)
In general, you should expect to pay 1% to 3% of your annual income on disability insurance, according to Policygenius, with shorter-term policies on the cheaper end.
How to Get Disability Insurance
If your employer doesn't offer disability insurance, you can purchase an individual policy through an insurance agent. Your state department of insurance can refer you to insurance carriers and agents who handle disability insurance.
When selecting the amount of coverage, consider your monthly expenses, long-term debts (such as a mortgage) and any other sources of income you could turn to if you were disabled. An insurance agent can help you determine how much disability insurance you need, based on your employer-provided disability insurance, life insurance and other financial resources you may qualify for if you become disabled.
You'll also want to consider how much coverage you can afford. A robust disability insurance policy could wind up affecting your financial health while you're still working if its premium payments are unaffordable.
How to Get Other Financial Assistance
Five states—California, Hawaii, New Jersey, New York and Rhode Island—either provide short-term disability insurance or require employers to provide it. Sometimes called temporary disability insurance, this coverage replaces wages for employees who can't work due to illness, accident, pregnancy or childbirth.
For longer-term disabilities, the Social Security Administration offers Social Security Disability Insurance (SSDI). If you're over 18 with a medical condition that will prevent you from doing any type of work for one year or more, or is expected to cause your death, you may qualify for SSDI. Depending on your income, you could also be eligible for state and federal assistance including Medicaid, HUD housing vouchers (Section 8), or the Supplemental Nutrition Assistance Program (SNAP).
Service-disabled veterans may qualify for disability payments and other financial assistance from the U.S. Department of Veterans Affairs. There are many other sources of financial support for disabled military veterans, including assistance with housing, medical care and daily living.
People who are temporarily or permanently disabled may also qualify for other financial assistance from government or charity organizations, or even student loan forgiveness or debt forgiveness from creditors. Credit cards and personal loans may offer credit disability insurance, which covers part or all of your payments if you are ill, injured or disabled. Some mortgage protection insurance policies pay your mortgage for a certain period if you're disabled.
Living With Disability
Adjusting your budget for your reduced income can help you stay on top of your bills even if you can't work. A good credit score is critical for people with disabilities, affecting your ability to get loans, credit cards and even housing. Keep an eye on your credit by signing up for free credit monitoring from Experian, and you'll have one less thing to worry about.