Guide to Disability Insurance

By Alexandria | Hightower on December 6, 2022

It’s impossible to know what the future holds. That’s why many choose to utilize insurance products to shield their most valuable assets from the unexpected. Of all the things you value the most—your car, your home, your health—your ability to work and earn a living is likely among the most important. Disability insurance ensures that you and your family are financially protected should you be rendered incapacitated or otherwise unable to work.

Yet despite its importance, just 1 in 3 working Americans have sufficient disability coverage. You never know when you might fall ill, get hurt, or otherwise become disabled and find yourself unable to cover your day-to-day needs. If you ever lose your ability to work, disability insurance can relieve some of the financial burden felt by you and your loved ones.

What is disability insurance and why is it important?

Disability insurance is fundamentally designed to help cover income loss caused by a qualified disability. Should an illness (psychical or physiological) or injury prevent you from working, your disability policy will kick in and provide you with weekly checks to supplement your living expenses. Although you won’t receive your entire income—payouts can range from between 40% and 80% of your former paycheck—you will receive a portion of it to pay for your needs.

To illustrate the importance of disability insurance, if you made $45,000 per year prior to suffering an injury that prohibits you from working, a long-term disability policy might pay out as much as $36,000 per year—not an insignificant amount. These funds can provide

much-needed financial assistance when it comes to covering necessities like food, rent, and utilities.

Who is disability insurance for?

Disability insurance is for those who rely on their ability to work and earn an income in order to support their lifestyle and the lifestyles of their loved ones. It’s important to note that

disability coverage is not just for older adults or workers with existing health conditions. Even if you’re still young and healthy, getting a plan in place might be a good idea, as more than a quarter of current 20-year-olds will be rendered unable to work for at least three months at some point in their lives. Further, 90% of long-term disability claims are the result of medical illness (arthritis, cancer, depression, etc.) as opposed to physical injury.

Put simply, disability insurance is for everyone who works for a living. Pilots and truck drivers who develop vision issues may be able to meet their income needs with the right plan. Similarly, professionals such as architects, accountants, and lawyers that lose the ability to work due to a traumatic brain injury or a degenerative disease can lessen their financial burden by opting for disability coverage.

Types of disability insurance

A variety of disability insurance plans exist to fulfill a broad spectrum of needs. The payout, duration, and premium are a few of the variables that separate these different plans. Each insurance provider defines “disability” a bit differently, so be sure to check whether you qualify before making a claim. Here are some common ones for you to consider.

Short-term disability (STD) insurance

Short-term disability insurance provides financial relief to those who become temporarily unable to work. This type of insurance typically covers workers who suffer an injury, get sick, or become pregnant, but aren’t expecting to be out of the workforce for good. STD policies will often compensate you for 40% to 60% of your working income and last for 3 to 6 months. Within two weeks of filing your claim, you’ll start receiving checks in the mail each week until you’re able to return to work or your policy expires.

Long-term disability (LTD) insurance

Long-term disability insurance helps workers who become unable to work for an extended period. In contrast to short-term disability insurance, LTD policies can cover you for anywhere from 2 to 10 years, or even until you reach retirement age. These plans are generally for workers who suffer from a serious illness or injury that keeps them from returning to work for years or indefinitely. The waiting period for LTD insurance can be lengthy, but you’ll receive between 60% and 80% of your former pay until you return to work or your coverage lapses.

Social Security Disability Insurance (SSDI)

The Social Security Disability Insurance program is a federal benefits initiative that provides financial assistance to Americans with disabilities. To access SSDI, you must have worked for long enough and paid Social Security taxes on your earnings. Additionally, you must be suffering from a medical condition that satisfies the Social Security Administration’s strict guidelines for disability qualification. These benefits are hard to come by and they’re only likely to account for a small percentage of your previous income. If you qualify, SSDI will cover you until you return to work or turn 65.

State disability insurance

You may be eligible to receive state disability insurance if you work in California, Hawaii, New Jersey, New York, or Rhode Island. In these 5 states, employers may be required to provide disability insurance for their employees, which partially replaces their wages should an illness or injury occur outside of the workplace. The qualifications for receiving benefits differ from state to state, so be sure to check your state’s requirements.

Workers’ compensation insurance

Workers’ compensation isn’t a form of disability insurance per se, but rather a form of accident insurance that gets paid for by employers. That said, workers’ comp is frequently misunderstood as disability insurance because it functions similarly. The difference is that workers’ comp only helps cover medical bills and rehabilitation expenses when you get hurt or fall ill while on the job. Therefore, you can’t plan on using workers’ compensation to insure against risks to your income.

Closing thoughts

Injuries can occur and health can deteriorate suddenly and without warning. These ailments might keep you from being able to work, potentially hurting your ability to earn an income and fulfill your everyday needs. A disability insurance policy can go a long way toward lessening the financial burden you experience while out of work.

If you’re interested in discussing your insurance options or have other questions regarding your finances, reach out today.

References

Fernando, Jason. “Disability Insurance Definition.” Investopedia, 2021, https://www.investopedia.com/terms/d/disability-insurance.asp. Accessed 11 July 2022.

Jackson, Amanda. “Social Security Disability Insurance (SSDI) Definition.” Investopedia, 31 March 2022,

https://www.investopedia.com/social-security-disability-insurance-ssdi-definition-522 3624. Accessed 11 July 2022.

Kagan, Julia. “Disability Income (DI) Insurance Definition.” Investopedia, 2022, https://www.investopedia.com/terms/d/diinsurance.asp. Accessed 11 July 2022.

Nabity, Colin. “Disability Insurance: What Is It & How Does It Work?” Breeze, 6 July 2022,

https://www.meetbreeze.com/disability-insurance/what-is-disability-insurance/#types- of-disability-insurance. Accessed 11 July 2022.

Schott, Fred. “How Many Working Americans Have Adequate Disability Coverage?” Council for Disability Awareness Blog, 26 April 2018, https://blog.disabilitycanhappen.org/how-many-americans-have-disability-coverage/. Accessed 11 July 2022.