Takeaways
- Disability insurance replaces a portion of your income if you become injured.
- Before 2020, 5% of working Americans experienced a short-term disability.
- Almost all short-term disability insurance plan have non-occupational coverage.
- Federal worker disability insurance is administered through the Office of Workers Compensation Programs.
- Questions about disability insurance for private employees can be answered by contacting your state’s workers’ compensation officials.
One of your most valuable assets is your ability to generate income. While most people don’t like to think about becoming injured and unable to work for months (or years) at a time, planning to get disability insurance is a smart money move.
Getting the right insurance coverage is integral to any sound financial plan. According to the Social Security Administration, studies show a 20-year-old worker has a 25% chance of developing a disability before retirement.[1] Purchasing the right amount of disability coverage can be your saving grace if you get injured. Here’s how it works.
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What Is Disability Insurance?
Disability insurance replaces a portion of your income if you cannot work due to injury or illness. It ensures you have financial support while you recover, which can help you pay for essentials like your mortgage, auto loans, student loans, utilities, and grocery bills.
Disability insurance spares you from the sudden impact of not having a paycheck. Policies cover a percentage of your monthly paycheck (based on whether you have short-term or long-term disability coverage) up to a cap of, say, $10,000 per month. Your company pays for your disability insurance as part of your employee benefit package.
Your policy gives you a partial financial safety net that kicks in if you cannot work for an extended period of time and are considered “disabled.”
How Disability Insurance Works
The first part of signing up for any disability insurance process is to select your policy structure and coverage amounts. Be sure to choose a policy that matches your household needs and the level of income protection you want. As part of this process, you should consider how much your household depends on your income to operate normally.
Depending on what type of disability coverage you opt for, you often get covered between 40 - 70% of your current base salary.
Your policy will explicitly state what percentage of your income will be replaced in the event of a qualifying “disability.” Policies differ in how they define “disability,” with some policies covering you only if you cannot perform your specific occupation. In contrast, others provide coverage if you cannot perform any job at all.
You want to pay close attention to waiting periods, which specify how long you must be “disabled” before you can claim benefits. Some insurers only require a short period, while others could require up to six months or more.
For example, if you have a 5-month waiting period, you will be paid for your disability in the sixth month after your disability starts. Some federal and state agencies pay out your benefits the month after they are due. If your disability commences on January 15, 2025, you won’t be paid until August 2025.
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Types of Disability Insurance
There are two main types of disability insurance: short-term and long-term disability. Each type of policy covers a unique set of needs. Here’s how they work:
1. Short-term Disability
As the name suggests, short-term disability insurance is a policy that will pay you a benefit for a short period. It usually covers your income needs for a few months to a year. Because this plan is suited for short-term income replacement, it covers a higher percentage of your income, usually between 60-70% of your current income.
These plans typically start providing benefits after a brief waiting period, which can be as short as one or two weeks. You can sign up for short-term disability insurance through your employer insurance. But you can get a standalone policy, too.
Short-term disability insurance is helpful if you face a relatively short recovery from an injury or if you need time away from work for pregnancy or minor surgeries. Insurance premiums for these policies can vary substantially, but most employers cover the whole cost for their employees.
2. Long-term Disability
Long-term disability insurance provides income benefits from a few years to the rest of your working life, depending on the policy.
Because this plan is structured for long-term income support, it covers a smaller percentage of your income, usually between 40-60% of your base salary.
The waiting period for long-term disability insurance coverage is typically much longer than short-term claims and can be 90 days or more. However, once that waiting period is over, your policy can replace a percentage of your income until the end of that benefit period or when your “disability” ends.
Long-term policies tend to be more expensive than short-term plans because they can pay out benefits over a longer time horizon. Some long-term policies include features like cost-of-living adjustments or partial disability coverage.
You want to think about a long-term disability plan if you are concerned about the impact of a serious work accident or chronic condition on the future of your family.
Smart Tip:
Protect yourself during the waiting periods by having an Emergency Fund and Slush Fund.
Where to Get Disability Insurance
- Enroll in an employer-sponsored disability insurance plan: To stay competitive in today’s job market, many companies offer disability insurance as an employee benefit. They cover the cost of your insurance premiums.
- Sign up for voluntary coverage: Not all companies can afford to pay for disability insurance for all their employees. Startups or small businesses might offer you the ability to purchase disability insurance through their insurance broker. This will give you the ability to choose exactly what package you want.
- Purchase an individual disability insurance plan: Another option is to purchase directly from an insurance broker or company. Talk to your financial planner about how to optimize getting short- or long-term coverage.
- Participate in an association group plan: Many professional associations offer association group plans for disability coverage. If you are current on your membership dues, you are probably eligible for plan participation.
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What Disability Insurance Covers
Disability insurance covers a wide range of issues. Here is a list of what is generally covered by short-term and long-term disability insurance:
Short-Term
- Pregnancies
- Infections
- Mental health issues
- ST Musculoskeletal disorders
- Injuries (fractures, sprains, ligaments)
Longer Term
- Cancer
- Circulatory problems
- Mental health issues
- LT Musculoskeletal issues
- Injuries (fractures, sprains, ligaments)
Read More: What Is a Health Savings Account (HSA)?
Variables Affecting Disability Insurance Costs
As with almost all types of insurance, insurance companies analyze different factors to assess the level of risk associated with your policy (and potential payout). Many insurance companies have proprietary models that allow them to price premiums.
Some of the most influential variables for disability insurance include:
- Age: The younger you are, the less expensive your policy will be because you are generally healthier.
- Health: Lifestyle choices like smoking or drinking alcohol can impact your health risk.
- Salary: Higher salaries require a higher payout in the event of a disability. The annual cost of long-term coverage is roughly 1-3% of your base salary.[2] (Read about How to Increase Your Salary).
- Occupation: Higher-risk occupations, like plumbing, machine repair, or construction work, make policies more expensive.
- Waiting Period: Shorter payout periods are more expensive, while longer payouts are less expensive. (Read about our Slush Fund Calculator).
- Qualifying Disability: Your policy defines what constitutes a disability. The broader the definition, the more expensive the policy.
Need to add more to your policy? Learn more about How Insurance Riders Work.
Individual vs. Employer-Sponsored Plans
- Individual plans are easier to tailor to your needs, like picking a specific benefit amount or length of coverage. If you change jobs, you can always keep an individual plan, but a separate plan comes with a higher premium almost all the time.
- Employer-sponsored plans are convenient, and the premiums are free because your company pays for them or discounted due to the group rates. That said, you cannot do much to change the terms or coverage levels. If you get a new job and leave your company, you will lose the insurance.
Smart Summary
Disability insurance is an insurance policy that covers part of your base salary if you become disabled. Plans are categorized as short-term and long-term coverage options and are usually offered as part of your employee benefits package. If you want a portable plan, you can purchase an individual policy. For highly competitive positions, your company will most likely cover the cost of your insurance premium disability.
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(1) Social Security Administration. Disability Benefits. Last Accessed February 25, 2025.
(2) Council for Disability Income. Disability Statistics. Last Accessed February 25, 2025.
