Disability insurance is a form of income protection that can cover up to 90% of an employed person’s income on a short- or long-term basis, regardless of how they became injured or disabled. Coverage starts at $300 per year but someone should expect to pay 1% – 3% of their annual income for a policy.
Disability insurance is one of the most difficult insurance products to understand because there are so many factors that determine cost and benefit payments. Policygenius makes it easy to navigate the choices of disability insurance terms and find the right policy that fits your needs. Visit Policygenius’ online portal to get a quote in as little as five minutes.
What Disability Insurance Is
Disability insurance pays a percentage of your income up to 90% if you are unable to work as determined by a doctor. Short-term disability replaces income for up to six months, while long-term disability extends beyond six months and can cover a person until they become eligible for Social Security benefits at the retirement age of 65.
Any employed person can benefit from having a disability insurance policy. That’s because not all injuries are a result of someone else’s liability and therefore not covered by insurance policies like workers’ compensation or auto liability coverage. If a person becomes disabled after a fall walking his dog and can’t work, disability insurance provides income up to 90% of his current wages.
How Disability Insurance Works
Disability payments provide wage replacement if a person is injured for an extended period of time. Whether it is employer benefits, private disability insurance, or Social Security disability benefits, timelines must be met based on the specific disability plan’s guidelines. With employee benefits and private plans, an injured worker can potentially get payments in a couple of weeks.
Disability insurance is one of the most complicated insurance policies available. Not only are there many factors that affect policy premiums, but policyholders are also often confused by the different payout amounts, policy waiting periods, and limits.
What Disability Insurance Covers
Disability insurance protects a percentage of your income if you become unable to work. Benefits pay up to 90% of income depending on the policy option and your actual current income. Waiting periods and maximum payment benefits don’t just affect rates, they affect when policyholders get money.
There are many types of injuries that will start disability benefits:
- Medical condition preventing you from going to work beyond sick days
- Falling off a ladder cleaning your house gutters, breaking your leg
- A car accident leading to permanent injuries
- Work injuries that lead to extended time off
- Falling off a swing while showing your child a cool trick, resulting in serious back injury
The deciding factor with any injury isn’t location or fault, it is the inability to return to work that extends beyond sick days and paid time off. An office worker might still be able to work with a cast on her leg while a truck driver can’t.
Disability insurance often coordinates benefits with other types of insurance policies, such as workers’ compensation, health insurance, and health indemnity policies. If you are a consumer injured at a business, it will coordinate with their general liability insurance. When purchasing disability insurance, cost is contingent on whether you are purchasing a short-term or a long-term disability insurance policy.
Short-term Disability Insurance Coverage
Short-term disability insurance is a policy that will replace your income for up to six months if you can’t work due to injury or illness. Most policies have an optional waiting period before coverage and payments begin, and short-term disability insurance applicants may choose to wait up to 14 days after becoming sick or injured to start benefits. Short-term disability can be a standalone policy or combined with long-term coverage.
Long-term Disability Insurance Coverage
Long-term disability insurance doesn’t start until six months after injury, and covers policyholders for disabilities that may become permanent. These policies often remain effective until age 65 when someone is eligible for Social Security benefits. This policy could be coupled with a short-term disability insurance policy or a stand-alone policy if a person feels they can wait six months before getting benefits.
Social Security Disability
If a person doesn’t have disability benefits through an employer or private policy, they may apply for Social Security disability benefits, called Supplemental Security Income (SSI). The waiting period is one year from the doctor’s designation of long-term or permanent disability. Benefits are paid for those 18 years or older who are not already on Social Security retirement benefits. SSI pays benefits until you reach age 65 and collect regular benefits, and cap at $771 per individual and $1,157 for a couple.
What Disability Insurance Doesn’t Cover
Disability insurance doesn’t cover everything associated with an injury or disability with payments that are designed to replace income. Policies don’t cover any additional costs like medical expenses or prescriptions. Those receiving benefits should maintain health insurance policies and consider other areas of aid for additional expenses.
There are also policies called “indemnity policies” that pay a specific dollar amount if you go into the hospital or have emergency medical expenses. Many carriers who offer disability insurance policies may also offer indemnity policies. These are generally less expensive policies with limited coverage based on actual hospital stays or income supplement, not replacement. Each policy is different.
Unlike disability insurance policies that pay wages, indemnity policies pay a fixed dollar amount based on a medical emergency event. It is up to the policyholder to choose how to use the funds. A person can also get both a disability insurance policy and an indemnity policy for extended financial coverage.
How to Apply for Disability Insurance
Applying for disability insurance is similar to applying for health or life insurance with a few added underwriting requirements. The application will consider health history and conditions. It may exclude pre-existing conditions or charge more for them. Because your benefit is based on your income, you will need to provide employer information and potentially verify income.
How Disability Insurance Is Taxed
Disability payments may be taxed or they could be paid tax free. The guidelines for what is taxable depends on who pays the premiums and how. If your employer pays for the disability benefits policy, the benefits are taxable while the employer gets the tax deduction. Policies paid with after tax dollars have tax-free benefits, but policies paid with pre-tax dollars as payroll deductions are taxable.
Be sure to ask about taxability when applying for disability policies and confirm when taking benefits payments.
Disability Insurance Costs
Disability insurance rates vary based on income, health history, waiting periods, and duration of payments. A minimum limited coverage policy could be as little as $300 and as much as $4,500 each year, but generally applicants can expect to pay 1% to 3% of their annual salary.
Typical Disability Insurance Costs & Deductibles
Costs are dramatically impacted by age, health history, carrier, state, and a multitude of coverage options chosen. Women are more expensive than men because of child-rearing risks. When shopping for rates, make sure the carrier offers you exact comparisons. Many providers quote disability insurance policies using different options, so be sure to get similar quotes if you want to make valid comparisons.
Some disability insurance policy options include:
- Short-term or long-term disability benefits: Taking payments for shorter time periods reduces premium rates. Short-term benefits are less expensive than long-term benefits because payments end after six months.
- Maximum payout: Selecting the total payment amount determines total risk to the insurance company. The duration of total payments often extends either two or five years or through to age 65.
- Waiting (or elimination) periods: Defines whether you want to wait 30, 60, 90, 180, or 365 days before payment benefits kick in. You get no benefits until after the elimination period is met.
- Own occupation: Pays benefits even if you can work as long as you are considered disabled and unable to perform your original profession. A surgeon could receive benefits even if he could still practice in other areas of medicine.
- COLA coverage: Increases payments based on inflation as a cost of living adjustment (COLA).
- Non-cancelable coverage: Guarantees that rates are locked and carriers cannot increase premiums or cancel the policy unless you fail to pay premiums.
The Council for Disability Awareness states that the average individual disability claim lasts no more than three years. Most people will opt for less expensive policies that provide higher income with some mid-range duration, such as a small waiting period and five-year payment period.
Disability Insurance Cost Example
This pricing example is for a male bookkeeper in good health, age 45, and making $50,000 annually with all riders added to the policy, including own occupation, COLA coverage, and non-cancelable. However, this policy would be less expensive without these additions. Quotes are adjusted based on the health of the person. For example, if this person has carpal tunnel syndrome, that would likely be an excluded condition for payments.
It’s also important to understand that having any waiting period built into a disability insurance policy doesn’t delay the payment of benefits—it actually cuts into the payment period. If you choose a waiting period of 180 days with a two-year payment period, you really only get 18 months of payments.
How Benefits Are Paid Example
For example, an independent contractor purchases a long-term disability policy to replace 60% of his income. He chooses not to buy a short-term disability policy. His policy has a 180-day waiting period. If he gets hurt today, he must first wait the six months during which normal short-term disability payments policies provide coverage.
His long-term policy “kicks in” at the end of the six months, but he still has a 180-day waiting period before he gets his first payment. He would have to have enough in savings to support himself and his family for the entire first year before he gets a check for 60% of his normal income. He is not eligible for Social Security disability payments in the first year either. Because he paid for his policy with after-tax dollars, his payments are tax-free income.
Disability Insurance Providers
Insurance carriers that carry disability insurance can offer short-term, long-term, and indemnity policies. Some carriers offer better rates and service depending on the type of policy and whether the policyholder is looking for personal or group benefits. A good disability insurance carrier will take the time to explain all the options and how they affect the ability to pay expenses during a short- or long-term disability.
Top Disability Insurance Providers
|Policygenius||Individuals who want long-term disability coverage.|
|The Hartford||Individuals looking for combined short-term disability plans.|
|Guardian||Small businesses owners who want benefits that extend business expenses.|
|Trusted Choice||Business owners who want to offer employee benefits including life and disability insurance.|
|Aflac||Individuals who want to consider short-term indemnity programs.|
Policygenius is an online insurance broker focused on individual lines of insurance, including your home, auto, and life insurance. The company takes applications via a quick online portal that provides quotes instantly. Policygenius’ goal is to provide consumers with a transparent way to assess and obtain personal lines of insurance.
Policygenius is a great choice for individuals seeking disability insurance. The online application is simple, making a very complicated insurance product easy to understand. With everything explained in layman’s terms, consumers are able to make better choices.
The Hartford is a national leader for individual and business insurance. This insurance carrier has the reputation of being an ally to small business owners. The Hartford maintains the highest financial scores with insurance rating companies and strives to constantly improve policy coverages and claims processes.
The Hartford is an excellent choice for small business owners or individuals seeking to balance the cost and coverage of both short-term and long-term disability plans. Because The Hartford is able to provide competitive price policies from the business and personal category, it helps clients find the best way to maximize coverage and prevent gaps in coverage.
Guardian is an insurance and financial services firm offering full-service planning and protection for individuals and business owners. Guardian has agents and advisers across the country to help customers find the right products that meet their long-term objectives.
Guardian is a perfect choice for the small business owner who is concerned that his disability will lead to the financial distress of his company. Guardian specializes in programs that don’t just pay the disabled small business owner, but provide benefits to the company to cover employee payroll and other expenses so the business can continue to operate.
Trusted Choice is a network of independent agents across the country. They work with agents and brokers to shop and find the best prices and best policies based on region and profession. Trusted Choice offers all lines, including personal and commercial lines of insurance.
Trusted Choice is a good option for small businesses seeking to offer more comprehensive benefits programs. It has an extensive network to help small business owners get disability insurance benefits for employees. These benefits may be paid for by the employer, employee, or a combination of the two.
Aflac is a company that specifically deals with illness and disability scenarios. It has transformed the way consumers view indemnity and short-term disability insurance plans. Aflac offers accident insurance, cancer insurance, critical illness insurance, and hospital indemnity insurance on top of short-term disability.
Aflac offers short-term disability through voluntary payroll options where employees pay their own benefits, making it easy and affordable for employers to offer added value. When going through payroll, many states don’t require the application to ask any medical questions, making it easier for employees to get better coverage regardless of health history.
How to File a Disability Insurance Claim
If you are injured or ill and unable to work, it’s important to file a claim as soon as possible. There may be waiting periods and processing time to get your benefits paid. You don’t want to wait and not have money for your expenses. It is important to follow these steps to get benefits approved and payments started in a timely fashion.
The four steps to file a disability insurance claim are:
- Call the insurance carrier: Inform the carrier about the disability. If you have an employer-sponsored disability plan, call human resources to start the claim process.
- Obtain claim forms: Your doctor will need to complete forms stating your condition, when the disability started, and prognosis for treatment and return to health.
- Collect pay stubs: The insurance company bases disability on current pay. You don’t get benefits for overinsuring; you just pay more premium for no reason.
- Follow up with everyone: Confirming that employers and doctors provide the required information as requested by the insurance company is imperative to receiving benefits. Updates will be requested monthly or bi-monthly; don’t assume they are complete.
Disability Insurance Coverage Example
An off-duty airport shuttle driver is at the park with his toddler, playing “tag” on the jungle gym. Completely focused on getting to his son to tag him, he misjudges one of the overhanging poles, hits his head, and falls backwards off the apparatus. He sustains a concussion and fractures two vertebrae in his neck, requiring surgery.
While he is in the hospital, his wife calls his employer to notify them of the incident and that he will not work. She requests the claims form. The dad has one week left of sick leave and one week of vacation time remaining. These are used for the first two weeks of coverage while his wife submits the forms with corresponding doctors’ paperwork. His short-term disability payments start on day 15 after his injury date.
Short-term disability will continue until he is able to go back to driving or six months pass. If he has a long-term disability policy in force, it will start when the short-term benefits end.
Disability for Small Business Owners
Disability insurance is costly to give as a fringe benefit to your workforce and is not required. It is often out of the price ranges for benefits of most small business owners. Employers can speak with payroll providers to discuss options for including disability insurance options either as a benefit paid fully or partially by the employer or exclusively by employees who opt in.
Disability Insurance for Self-employed Individuals
A self-employed person is at increased risk of financial hardship if he becomes disabled for any period of time. The self-employed business owner or independent contractor is often the only source of revenue for the company. Being out of work can impede income to cover even basic living expenses, let alone the costs of medical care and rehabilitation.
Every self-employed business owner should sit down with their insurance agent or broker and do a complete analysis of health insurance, workers’ compensation, indemnity policies, life insurance, and disability insurance options. Insurance benefits should be considered in combination with independent savings and assets that can be used in an emergency scenario to help save on insurance expenses.
Understanding Life Insurance Living Benefits
Many permanent life insurance policies, such as whole life or universal life, have what are called “living benefits.” These usually cover costs associated with a terminal illness. Don’t assume living benefits will cover long-term disabilities unless the contract explicitly states that. It is possible to access the cash value of these policies to use in short-term disability scenarios.
Review whole life insurance, variable life, and universal life insurance policies to determine if you have any living benefits and exactly what they cover. Every policy is different when it comes to addressing living benefits, though the most common is benefits are paid in a terminal illness. Disability is not considered a terminal illness in most cases but can be. Calculate how long any living benefits or cash value would last should you be able to access them for disability.
Many small business owners use Professional Employer Organizations (PEOs), such as Zenefits, as an affordable way to administer employee payroll and benefits. With Zenefits, employers have the ability to let employees buy disability insurance as a payroll deduction when providing full benefits is not cost-effective for the entire company. This is a great employer-employee structure, but employees need to understand the tax ramifications of benefits.
Disability Insurance Frequently Asked Questions (FAQs)
You may still have questions about disability insurance. Disability insurance is complicated, so be sure you have the answers to your questions before you buy.
What does a hospital indemnity policy cover?
A hospital indemnity policy pays a specific amount to the policyholder for unexpected hospital stays and emergency room visits. This is usually a per day value and may also include payments for specific tests or procedures. This is not health insurance, and it may be used in combination with health insurance policies to cover additional costs such as deductibles.
When should you get disability insurance?
Disability insurance is something you can’t wait to buy if you are purchasing it on your own. The most favorable rates pay 60% of your current pay starting three to six months into your disability. Short-term disability from an employer should get you through the gap period before benefits start. Payments continue through age 65 if you remain disabled.
Are disability payments taxable?
Disability insurance payments may be taxable they are received as part of a benefits package paid for by an employer. If you have paid the disability insurance premium with after-tax dollars, your disability benefits payments are tax-free. Social Security disability payments are tax free, but employer paid and pre-tax funded benefits are taxable.
Disability insurance policies protect your income if you get hurt and cannot work. Specific benefits vary greatly based on elections made at the time of purchasing the policy, and there are a lot of factors involved regarding underwriting such as health, payment periods, and work history. It is best to get disability policies when you are young and healthy, similar to life insurance, to keep premium costs down.
Setting expectations when buying disability is important for avoiding disappointment the day you call to make a claim. Policygenius’ online application doesn’t just take you through the quote—it clearly explains what choices you are making and why. In five short minutes, you’ll understand disability insurance better than most people and be able to make the best decision for you and your family.