In the event a disability that prevents you from working occurs, disability insurance helps replace a portion of your lost income.
Although it may seem that Social Security disability benefits provide similar protection, many workers assume they do not need private disability insurance because those benefits exist.
What many fail to understand is that eligibility for Social Security disability benefits depends on the severity of the condition; if the injury or illness does not meet the program's threshold for severe disability, the worker will not qualify. Even when a worker is eligible, Social Security benefits generally do not begin for six months and are rarely sufficient to cover all living expenses.
Disabilities that continue for an extended period can deplete savings before a return to work is possible, so private disability insurance is often the most reliable method of financing a long-term disability. For more background, see The Importance of Disability Insurance.
The maximum coverage through private long-term disability insurance is typically 45% to 70% of your salary, depending on your annual earnings. Premium cost is largely based on job risk (for example, physical labor is usually rated higher than professional employment), as well as age, overall coverage amount, and health history.
You might choose to supplement an employer disability plan with your own policy; if so, you will want to coordinate coverage by knowing the employer plan's benefit amount, benefit period, and waiting (elimination) period. Read more about policy options at Disability Income Insurance.
There are six key provisions that you'll want to look for when purchasing a disability insurance policy:
Six key provisions
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1. What is considered a disability by the policy? Some policies define disability as the inability to perform the main duties of your occupation, while others define it as the inability to perform any job. Understand the policy's definition in relation to your specific occupation.
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2. Does the policy have a non-cancellation clause? A non-cancellation clause means the insurer cannot increase your premiums or cancel the policy until a specified age (commonly age 65), except if you fail to pay premiums.
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3. Does the policy include residual disability payments? Residual or partial disability benefits pay a portion of benefits if you are partially disabled and must take a lower-paying job; payments are proportionate to the wage difference.
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4. What is the benefit waiting period for the policy? Generally, the longer the waiting (elimination) period, the more affordable the premiums. If you have employer coverage, you may choose a longer waiting period on a personal policy to lower cost.
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5. How long will I receive benefits from the policy? Many private long-term disability policies provide benefits up to age 65, though some offer shorter or longer benefit periods.
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6. Will I remain insurable? Look for provisions that allow you to purchase additional coverage in the future without new medical underwriting.
Short-term and long-term disability policies differ in purpose and design; for a focused discussion of short-term options, see Understanding Short-Term Disability Insurance.
Sadly, no one knows when an accident or illness will strike and cause a long-term disability, and without preparation the financial impact can be severe.
If you're unsure how to coordinate employer and personal coverage or which waiting period and benefit period suit your needs, talk to an agent.
Frequently Asked Questions
How much of my income can disability insurance replace?
Private long-term disability policies commonly replace about 45% to 70% of pre-disability income, depending on the policy and your income level.
Are disability insurance benefits taxable?
Benefits from a policy you purchase with after-tax dollars are typically received tax-free; benefits paid under an employer-paid policy are often taxable to the recipient.
What is the elimination (waiting) period?
The elimination period is the time you must wait after a disability begins before benefits start; choosing a longer period usually lowers the premium.
What is residual disability coverage?
Residual coverage provides partial benefits if you can work in a reduced capacity and earn less than before your disability, with payments proportional to income loss.