What Is Disability Insurance and How Does It Work?

What we'll cover:

• Disability insurance can help replace a portion of your income if you’re unable to work due to illness or injury.
• For many people, short-term and long-term disability insurance can be a vital tool to protect you and your family in case the unexpected happens.
• Generally, you can obtain a policy through your employer or a private insurance company.

Disability insurance is a type of supplemental insurance that can help replace a portion of your lost income if you’re unable to work due to a qualifying disability, injury, or a specific medical condition.

Experiencing a disability can range from a temporary situation to severe and permanent debilitation. Maybe you’re unable to work for a month after recovering from an illness. Or perhaps, you've sustained an injury from an accident that prevents you from returning to work for a year or more.

Whatever the case may be, it can quickly deplete your finances if you’re not properly covered. While some governmental assistance is available, it’s often limited with strict qualifications for eligibility.

For many people, disability insurance can be a vital tool to protect you and your family in case the unexpected happens.

How does disability insurance work?

Broadly speaking, there are two types of disability insurance: short-term and long-term.

Short-term disability generally covers up to six months of unemployment and can be ideal for situations like maternity leave, scheduled surgeries, or injuries with a short recovery time. Some employers or providers may offer short-term plans covering up to 100% of your regular pay.

Long-term disability provides coverage for extended periods or until you qualify to receive your Social Security benefits. These policies rarely replace your full pay but often cover 50%-75% of your income, helping you and your family through difficult times.

Keep in mind that benefit amounts and duration will vary from plan to plan. It’s important to review the terms and conditions of your specific policy carefully to understand your coverage levels.

Most policies also include an elimination or waiting period before benefits begin. While a longer waiting period often reduces premiums, this will require you to cover living costs over that period of time prior to benefits being paid out. Depending on your workplace benefits, you may be able to use sick time or paid time off to help bridge the gap.

How do I get disability insurance?

You may choose to go through your employer, a private insurance company, or Social Security.

Generally, it’s a good idea to start by reviewing policies offered by your employer, as these can be cost-effective. Employer plans benefit from group discounts, but private insurers also provide coverage options that may be less costly for certain individuals.

When comparing policies, carefully review the plan rules and key definitions; for instance, how do they define “disability” and “pay”? This can help ensure you’re adequately covered.

You’ll also likely come across two important distinctions. Generally:

• Own occupation: Covers you if you’re unable to work in your current or regular profession.
• Any occupation: Covers you only if you cannot work in any job. For instance, a surgeon who injured their hands and could no longer operate on patients but could work on administrative tasks may only receive benefits under “own occupation” coverage.