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What is disability insurance and who needs it? (Companies + Rates)

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UPDATED: Mar 13, 2020

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With one in 20 adults likely becoming disabled at some point in their career, disability insurance is a wise choice. With research, knowledge, and a firm understanding of what disability insurance is, we can help you start the process of finding the right disability insurance company to meet your specific needs.

Want to see what policy can work for you? You are only a few clicks away. Check out our FREE quote tool above right now.

What is disability insurance?

Disability insurance provides you income in the event you become disabled or unable to perform the duties of your job at any point in your career. When you become disabled, your source of income goes away, and if you do not have an emergency fund or a savings account set aside, many individuals quickly end up in financial ruin.

Disability insurance offers a source of income to individuals, especially the main income earners, who find themselves unable to work due to an illness, injury, or accident.

The average disability claim lasts approximately 13 months, so preparation for the unexpected is imperative, especially for those that are self-employed or who are the main income earner for the family.

Up next, let’s take a look at how it works.

How Disability Insurance Works

There are many types of insurance offered by your employer that many of us understand but one is somewhat misunderstood and rarely invested in.

Worker’s compensation protects an employee if they are injured while on the clock. Health insurance enables us to seek medical care when we are sick or need any kind of medical assistance, but what about disability insurance?

Disability insurance is there to replace a portion of an employee’s salary or income should they need to take time off from work, whether short-term or long-term, because they cannot work due to illness or injury.

When it comes to disability insurance and premiums, keep in mind that premiums are lower for office workers and those occupations that fall into a lower risk class than for someone who is a firefighter, police officer, or construction worker, which is considered a high-risk occupation.

Also, a good portion of short-term disability claims is for complications due to pregnancy, so women of childbearing age may be more likely to pay higher premiums, as well. For pregnancy, six weeks of short-term leave and eight weeks for c-sections is typical. However, there are times when longer is needed.

So, who should consider it?

When to Consider Disability Insurance

Everyone should consider disability insurance because you never know if you will succumb to an injury or illness at some point in your life that will keep you from working and earning a salary, However, there are certain groups of people that should definitely consider disability insurance.

  • The Income Earner – The one that works outside the home earning a living for the family; disability insurance protects your earning potential and fills the gap so you can focus on getting well without putting your livelihood in jeopardy.
  • The Physical Laborer – If you work in a field that requires a lot of physical labor, such as construction, nursing, physical therapy, or anything expecting you to be on your feet day in and day out, and if your disability were to make you unable to lift, walk, or stand, you would benefit from disability insurance. Your plan picks up where other policies leave off, so you don’t dip into savings or an emergency fund to pay bills while you’re recovering.
  • Parents – If you have minor children at home and they depend on your income, consider disability insurance, which provides funds if you are unable to perform your duties. You will still need to care for your family if you are sick or injured so make sure you have a plan in place.
  • Prior Injuries – If you’ve struggled with recurring issues like back problems to other nagging conditions, disability insurance can act as a safety net if you are out of work for an extended period of time. If you do have continued medical conditions, then you are at a higher risk of an injury in the future.

Differences Between Long-Term Disability and Social Security Disability Insurance

There are some advantages and disadvantages to both types of disability insurance. Long-term disability insurance gives a higher benefit payout should you need it; however, you are paying a monthly premium for this insurance without knowing if you will ever use it in the future.

Social security disability insurance is provided by the U.S. government, so you are not having to pay a monthly premium, but the benefit payout is smaller per month if your claim is approved.

Also, the elimination period is much longer with the social security administration, so you will be financially responsible for that time period until your benefit payments start.

Below is a comparison chart looking at both types to see where they fall in important categories.

Key FactorsSocial Security Disability InsuranceLong-Term Disability Insurance
Average CostNo cost$1,000-$3,000/annually
Benefit Payment PeriodLength of disability - no limitFor purchased length of time - 2, 5, and 10 years to retirement
Coverage AmountAverage of $1,188/month (standard percentage of income)Up to 60-70% of salary
Elimination/Waiting PeriodTypically six monthsVaries by policy - average time 90-180 days
Where to PurchaseApply to U.S. GovernmentPrivate insurance companies; some employers may offer plans
What is CoveredMusculoskeletal system, special senses & speech, respiratory disorders, cardiovascular system, digestive system, genitourinary disorders, hematological disorders, skin disorders, endocrine disorders, congenital disorders that affect multiple body systems, neurological disorders, mental disorders, cancer, immune system disordersMusculoskeletal system, arthritis, back injury, cancer, injury due to accident, cardiovascular/circulatory disorders, mental disorders

As you can see from the chart above, the benefit payments from a private insurance company are higher but you are paying a monthly premium for that higher coverage. However, trying to get your claim approved is more difficult with the Social Security Administration and, if approved, the waiting period is much longer than with a private insurer. There are pros and cons to both types of disability insurance.

Main Reasons Social Security Disability Claims Are Denied

When filing for social security benefits, people go into the process very hopeful and are somewhat naive about how difficult it is to be approved.

There are many factors out of your control, but there are some things you can do to make the process go as smoothly as possible. Below are reasons many claims are denied. They are helpful for you to keep in mind as you prepare to submit yours.

Not Disabled for a Period of 12 Months

The Social Security Administration defines a disability as a physical or mental condition that can last or is expected to last for a minimum of 12 months. If it is likely that the condition can be resolved within 12 months, then the individual will not be approved for social security disability insurance.

Continued to Work While Disabled

When someone becomes disabled, they find they still need to work due to financial obligations while they apply for social security disability insurance.

However, if they are working and earning more than $1,220 per month, they will likely be rejected because the Social Security Administration will assume that they can work and are not disabled.

Waited Too Long to Apply for Disability

As individuals acclimate themselves to their new medical condition, they may take a little extra time to see if their condition worsens or improves. However, the Social Security Administration requires the most recent medical and health records for new claims, and delaying the application process reduces the chance of approval.

Lack of Medical Evidence to Support Disability Claim

The severity of the disability is on the individual to prove through thorough and accurate medical records. These medical records must document an individual’s inability to work due to their current health condition. If they don’t, it could negatively impact their claim.

Failed to Follow Recommended Treatments as Stated in Treatment Plan

When a claimant fails to follow a prescribed treatment plan, it becomes difficult for the Social Security Administration examiner to determine if the claimant’s inability to work is due to their medical condition or their lack of following the treatment plan.

Improperly Completed Claim Forms

There are many forms to be completed and they should be filled out properly. Make sure you give detailed answers to every question and review every page before submitting it.

What does disability insurance cover?

Employees must be covered by a short-term disability policy, either privately owned or employer-paid, to use the benefits.

For most employees to qualify for their short-term disability insurance, they only need to meet the requirements of their insurance provider, which varies by provider.

Basic requirements are typically a minimum earning amount and that they are full-time employees.

Disability insurance does not cover pre-existing conditions or time off to care for a loved one or to adopt a child. It also does not protect your job while you are on disability, meaning you can be terminated while on short-term disability leave.

Understanding Your Disability Insurance Policy

First, let’s look at some key terms.

Key Terms of Disability Insurance

As you are shopping for the right disability insurance policy, you may run across terms that seem confusing or unfamiliar. Below are some terms you will find useful to help you make an informed decision about what will be the best policy for you.

  • Own-occupation –  If you can work at a different job other than your current one, even if that means a pay cut, then you are not considered disabled and not eligible to receive benefits.
  • Automatic increase benefit – An insurance policy rider that increases the monthly benefit. This increase is done annually.
  • Benefit period – Length of time in which your benefits are paid. The shorter the benefit period, the lower the monthly premium.
  • Elimination periodAlso called the waiting period, this is the number of days from the onset of disability that you have to wait before you can start receiving benefits. The elimination period depends on the type of policy, short- or long-term.
  • Exclusion – A provision in your disability insurance policy that outlines what will not be covered as a disability.
  • Underwriting – When the disability insurance company determines the actual monthly premium rate based on medical records, medical exam, and your finances, they then calculate what you can afford, and you’ll need to pay in premiums.

Factors That Affect the Cost of Disability Insurance

Not all premiums for all employees from every insurance company will be the same. For example, you have the same employee of the same age earning the same income but pay a much different premium based on the following factors:

  • Occupation – In someone’s occupation, the more hazards that can potentially happen on a daily basis will increase a person’s premium. For example, anyone working with heavy equipment, construction, or first responders will pay a higher premium along with those that stand or are bent over for long periods of time such as dental hygienists and beauticians, will pay higher premiums as well.
  • Health – A person prone to possibly disabling conditions such as back or spinal injuries, asthma, arthritis, and heart disease, will likely pay a higher premium than someone without such conditions. These health conditions will negatively affect your premiums.
  • Benefit Period – Your benefit period is the time in which your insurance company will pay for your disability. The shorter your benefit period, the less your policy will cost.
  • Elimination Period (Waiting Period) – This period is the amount of time you must be disabled before your benefits kick in. Typical elimination periods are 30, 60, 90, and 180 days. Once the elimination period concludes, payments are retroactive back to the first date of disability.

It is difficult to plan for something unforeseen and that may never happen; however, having the peace of mind that you are covered if you become unable to work is worth the additional coverage.

Disability Insurance & Taxes

When you receive income from your disability insurance, you may or may not be taxed on that income depending on how premiums were paid and by whom. This means if premiums were paid with pretax or after-tax dollars and if you or your employer paid the premium or a combination of the two of you.

If you own an individual disability insurance policy and pay premiums with after-tax dollars, benefits received will be tax-free, but you cannot claim these on your taxes as a medical expense. If you pay with pre-tax dollars, then your benefits will be taxed.

It is a concept of “pay me now or pay me later” — the IRS will get their money, either way, you just choose at what time you would rather have the money paid to them.

In an employer plan, if your employer pays the premium, typically your benefits will not be taxed. However, there are some plans in which employers pay the premium but do not include it in the employee’s gross income, so any benefit paid out will be taxed.

If you and your employer split the cost of the premium, then the payout is only partially taxable.

Is disability insurance a good investment?

Becoming disabled is never anyone’s plan; however, the likelihood is that one in four people who are age 20 today can expect to lose at least one year of work due to a disabling condition before they reach the normal age of retirement.

Even though disability insurance can be one of the most expensive policies you can purchase, it is one that brings peace of mind if something does happen to you, because you will still have an income while you are recovering.

The cost expense of these policies is mainly due to the level of coverage and your age, income, and health at the time of application. Also, keep in mind that the short-term will be less expensive than long-term disability insurance.

Along with considering disability insurance, it is important to have an emergency fund and to continue saving for your retirement and other emergencies that may happen in inconsistent and vigorous ways, especially if you are the main income earner for your family.

For those that do struggle with the cost of these policies and wonder if disability insurance is truly a cost-effective option for them, they can use the calculator called What’s My Personal Disability Quotient created by the Council for Disability Awareness. This calculator tells you the percentage chance of becoming disabled in the future for at least three months.

However, everyone is cautioned that no matter your percentage, the risk of becoming disabled is present, which leads to loss of income and potential financial devastation for which disability insurance would help alleviate those financial risks.

Even though private disability insurance can be expensive, it is a key part of a sound financial plan for you and your family if you are the main income earner.

When shopping for a disability insurance policy, look for a non-cancelable one with benefits for life or until age 65. You want as much coverage as possible or as much as you can afford. When shopping, most insurers will cover up to 65 percent of your salary, so this coverage in combination with what you can afford should total or be equal to two-thirds of your present pre-tax salary.

Knowing this should help you make a sound financial plan for your future.

Types of Disability Insurance

Disability insurance is insurance for your paycheck. It provides you with a steady income if you suddenly become unable to work due to illness or injury.

Disability Life Insurance Options
Key FactorsShort-Term DisabilityLong-Term Disability
Elimination PeriodOne to 14 days10–53 days
Length of CoverageNine to 52 weeksFive to 10 years, as long as disabled until age 65
Wage Coverage40–60% of regular wages50–70% of regular wages
Disability Coverage ExamplesChildbirth, arthritis, injuries from an accident, back problemsInjuries from an accident, mental health problems, cancer, musculoskeletal disorders, nervous system disorders

First, let’s discuss short-term disability insurance.

Short-Term Disability Insurance

Short-term disability is coverage for an injury or illness that requires you to take time off from your employment for a short period of time that lasts anywhere from nine to no more than 52 weeks. Coverage typically kicks in one to 14 days after an employee has been out of work.

Filing a Claim

When it comes time to file a claim for short-term disability benefits, there are necessary steps to follow to give you the best chance at collecting your benefits.

  • Obtain the Claim Form – Contact your HR department for the proper forms needed to start the claim. They may be available online, as well.
  • Fill Out Form – Complete form accurately with all necessary details, including date of injury, last day of employment, and your contact information.
  • Employer’s Section of Form – The employer must complete their section of the form regarding your employment — duties, length of employment, and salary. If you are self-employed, you most likely qualify for social security disability benefits if you should ever need it. You pay your employment taxes based on estimated taxes or on your tax return, qualifying you for the benefits so long as you have worked enough years and have paid your taxes recently.
  • Physician’s Statement – Your physician will need to validate your condition or illness and sign the form.
  • Submit – Once the form has been completed in full, make sure you keep a copy for your records and submit the original according to the instructions on the form.

Long-Term Disability Insurance

Long-term disability insurance covers an employee for a longer period of time when they cannot work due to injury or illness. Long-term coverage can last anywhere from five to 10 years until age 65 and pays 50-70 percent of employee’s salary.

Your coverage typically starts 10-53 days after the first day you are unable to work. Your short-term disability coverage can take care of you during the elimination period.

Filing a Claim

Filing a claim for long-term coverage is essentially the same as short-term, except your insurance company may ask for more extensive medical documentation throughout the waiting period to confirm that medical condition has not changed or improved.

Disability Insurance Riders

Riders are add-ons that allow a policy owner to customize their policy to fit their needs. Most riders come at an additional cost to the policy owner, and you must purchase them when you buy your initial policy — but some do come standard or added at no additional cost.

No-Cost, Long-Term Disability Riders

  • Guaranteed Renewable – The insurance company cannot cancel your policy as long as you pay your premiums
  • Waiver of Premium – The insurance company will waive premium while you are on a claim and will continue until you are able to work again
  • Presumptive Total Disability – Full benefit will be paid out immediately if you lose sight in both eyes, lose your hearing, lose your speech, or lose two limbs, no matter the elimination period or whether you’re working
  • Family Care Benefit – Full benefit of your policy will be paid out if you choose to take time off to care for a family member
  • Survivor Benefit or Death Benefit – If you should pass away while on a disability claim, your beneficiary will receive compensation; however, this is separate from your life insurance
  • Occupational Rehabilitation – The insurance company will help pay for vocational training after your disability to help you return to work.

Recommended Riders at an Additional Cost

  • Own Occupation – The disability claim is specific to your occupation even if you are able to work in a different occupation
  • Non-Cancelable – This rider guarantees the premium so the insurance company cannot change the price you pay; however, most disability insurance companies typically do not reprice policies
  • Future Purchase Option – If you expect your income to increase at any time in the future, this rider allows you to increase your coverage without additional underwriting or medical evidence
  • Cost of Living Adjustment (COLA) – This rider will increase your monthly benefit, only while claiming disability, based on the Consumer Price Index or other cost measurements which allows you to stay on par with any inflation that may occur while you are out on a claim
  • Catastrophic Disability Benefit – If you become so seriously disabled that there is a loss of at least two daily activities, you will receive a benefit

Shopping for Disability Insurance

Disability insurance can cost anywhere between $1,000 to $3,000 a year or more depending on age, annual income, and type of employment. When looking at employment, the insurance company determines if you are a minimal risk or places you in a high-risk category, which will affect your premium rate.

When looking for disability insurance coverage, consider what your monthly income needs would be at various times of your life when a disability may occur. If your company offers long-term disability insurance, take that coverage amount into account.

From there, the difference between the income received from your company and what you need to make ends meet becomes the coverage you need for private disability insurance.

Once you have an idea of your coverage amount, you need to think about your payment period to receive your benefits. When considering the payment period, take into consideration your age, how much you enjoy your occupation, and your present financial situation.

Of course, the longer you choose to receive payments, the more expensive the policy. Many policies range from two to five years but can extend to retirement age.

Best Providers for Disability Insurance

You have now considered price, coverage, and length of your disability insurance. Now, let’s take a look at some of the best disability insurance companies out there. They each have their own individual strengths so there is definitely one that will fit your specific needs.

ProviderA.M. Best RatingReason
AssurityA-Good for self-employed; offer Simplified Disability - only requires phone interview, prescription check, and MIB check with protection up to $3,000
Guardian LifeA++Offer an Own Occupation plan; disability offerer under their subsidiary Life Insurance Company of America
Illinois MutualB++Offers Business Expense Power for business owners - if something happens to owner money is given to cover expenses and other needs to get business's doors open and running again
Mass MutualA++Disability plans are own occupation; also offers a recurring disability feature so if a new disability occurs that is related to a previous claim then company will waive the elimination period for current claim
Mutual of OmahaA+They offer very customizable plans with built in benefits along with other riders that can be added
The StandardAThey offer no cost riders and benefits with their disability policies

This is not an exhaustive list of disability insurance providers but one to get you started. When you are researching insurance companies, make sure you do look at their financial rating and choose one with a high or superior rating.

What You Need to Consider When Purchasing Disability Insurance

As you begin to consider what policy is right for you, keep these points in mind to help guide your research.

Requirements

Make sure you understand what disability means under your plan. Is it the inability to perform the majority of duties of your current job in which you were specially trained (own occupation) or any job in which you can work even if it is not in the field in which you were trained (any occupation)?

Some policies may require you to take a lesser paying job even with your disability, because you can perform those job duties and will, therefore, not consider you disabled.

Waiting Period

The elimination/waiting period is the time you have to wait to start receiving your benefit payments. It begins the first day of your disability leave and when your benefit payments begin.

The waiting period varies from carrier to carrier, but not by much.

However, you should know what the waiting period is so you can be aware of your financial responsibility before your benefits begin. If you are taking short-term disability, some individuals will use sick time to cover the waiting period.

If it is a long-term disability, you can use your short-term disability to cover this waiting period.

Cancellation

Check your policy to see if it is non-cancelable. If so, this type of policy cannot be canceled as long as you are marking your premium payments.

Additional Considerations

Something else to consider would be the availability of purchasing riders if you wanted to personalize your policy, such as a future purchase option or cost of living adjustment (COLA).

Also, make sure your insurance is the first payer. If they are not, then any other sources of income you may receive will be taken into account and deducted from your benefit payment. This is called an integration clause. If your insurance company is the first payer, you will receive the full benefit payment.

Purchasing disability insurance is never an easy decision, especially when your hope is that you will not become disabled in the future; however, if you do, you want to be sure you have this option to cover you in the chance that you do.

Pros & Cons

There are always points that don’t quite fit or make you question if this decision is a good idea. But isn’t that always the case? Here’s a quick rundown of the pros and cons of disability insurance.

Pros

  • Portability – Once purchased, it is yours to take with you no matter where you work, as long as you pay your premiums
  • Definition of Disability – You can create a more personalized policy that increases your chances of receiving your benefits if you become disabled, especially in a highly specialized occupation
  • Tax-Free Benefits – Your premiums are not tax-deductible but your benefits are tax-free so you can get as much money as possible while on disability
  • Control Over Other Features – You can customize your coverage with additional riders to meet your specific needs

Cons

  • Cost – Private disability insurance is more expensive than group disability insurance, especially if you work in a high-risk occupation or have pre-existing medical conditions
  • Complexity – Complicated product, look for an independent insurance agent that can help you navigate the different companies and policies
  • Medical Underwriting – There is a need for a medical exam and review of medical history to assess current medical condition which is a nuisance and time-consuming to some
  • Elimination Period – Have to wait for this to expire before receiving your benefit payments, so you are financially responsible during this time period

The Bottom Line

Disability insurance provides you with a financial safety net if you should become disabled at some point in your career. Think of this as insurance for your paycheck. It will provide you and your family income, allowing you to stay home and recover, whether short-term or long-term.

The hope is that you will never have to use this insurance, but knowing it is there should one more step to securing your financial future for your family.

Is a disability insurance policy right for you? Start your search right now! Use our FREE online tool below to find the best rate.

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