Why income protection matters
Your ability to earn an income is often your largest financial asset. Disability insurance pays a monthly benefit that replaces part of your earnings if illness or injury keeps you from working. The risk is not remote: the Social Security Administration estimates that about one in four of today's 20-year-olds will become disabled before reaching full retirement age.
Social Security is a limited safety net
Social Security Disability Insurance (SSDI) uses a strict definition: you must be unable to do substantial gainful work because of a medical condition expected to last at least a year or result in death. Benefits generally begin only after a five-month waiting period, and approval can take months. Private coverage fills the gap for shorter disabilities and for people who could do some work but not their own job.
Short-term and long-term coverage
- Short-term disability pays for weeks or months after a brief waiting period and often covers recovery from surgery, injuries and childbirth.
- Long-term disability starts after a longer elimination period and can pay for several years or until a set age, such as 65 or 67.
Coverage comes from group plans at work, individual policies, and in some places state programs. California, Hawaii, New Jersey, New York and Rhode Island, plus Puerto Rico, run mandatory temporary disability programs for most private-sector workers, and several other states have added paid family and medical leave programs.
Key policy terms
The definition of disability is the most important term. Own-occupation coverage pays if you cannot do the duties of your own job, even if you could work in another field. Any-occupation coverage pays only if you cannot work in any job suited to your education and experience. Many group plans use own-occupation for an initial period, then switch. The elimination period is how long you must be disabled before benefits begin, and the benefit period is how long they can last. Residual or partial disability riders pay a proportional benefit if you return to work at reduced earnings, and cost-of-living riders adjust benefits for inflation.
Taxes and what drives the price
Under IRS rules, benefits from a policy you paid for with after-tax money are generally not taxable, while benefits from an employer-paid plan are generally taxable income. Premiums depend on age, health, occupation class, income, the benefit amount, the definition of disability, the elimination and benefit periods, and riders. Non-cancelable policies lock in premiums and terms; guaranteed renewable policies cannot be canceled but rates can rise for a whole class of policyholders. Group coverage at work is usually cheaper and needs little underwriting, but it typically ends when you leave the job and may not count bonuses or commissions as income.
How to choose coverage
Start with any group coverage at work and find out what it pays, for how long and whether benefits are taxable. Compare that with your essential monthly expenses and look at an individual policy to fill the gap, especially if you are self-employed or your job requires specialized skills. Choose an elimination period your emergency savings can cover. Our disability insurance calculator helps estimate the benefit you may need.
How claims work
Notify the insurer as soon as you expect to be out of work, and submit the claim form, an attending physician statement and proof of income. Insurers usually require ongoing medical updates. Many long-term policies reduce the benefit by any Social Security disability payments you receive, and insurers often ask claimants to apply for SSDI. Most employer-sponsored group plans are governed by the federal ERISA law, which requires you to complete the plan's internal appeal before going to court, so keep copies of everything and meet every deadline.
Polis Re helps you compare individual disability insurance options and request quotes in one place. Policies are issued by licensed insurers and placed through licensed producers in your state.
