Disability Insurance

The definition of disability will vary depending on the terms of your own individual policy and/or your employer's plan. Some policies and plans consider you disabled when you're unable to perform the duties of your own occupation, while others pay only if you're unable to perform in any job suitable for you based on your training, education and experience. Some policies and plans may use an own-occupation definition for a period of time (e.g., two or three years), after which an any-occupation definition is applied. Other policies and plans require that you not be gainfully employed while you're collecting benefits or that you are unable to earn a certain percentage of your pre-disability income because of injury or sickness.

There are policies and plans that will pay you a portion of your total disability monthly benefit amount if you have lost a part of your income due to a disability-this type of feature is usually referred to as a residual or partial disability benefit. Additionally, some policies and plans may include a rehabilitation benefit that pays some or all of the cost of occupational rehabilitation approved by the insurer while other plans may include a rehabilitation provision that requires you to take part in an occupational rehabilitation program in order to continue to receive benefits.

Keep in mind that many policies and plans have exclusions and limitations and may not cover disabilities caused by suicide attempts, war, or attempts to commit a crime. Disabilities due to pre-existing conditions are also frequently excluded for a period of time after the plan or policy goes into effect, and some plans and policies will limit the maximum benefit period for disabilities caused by mental disorders and substance use disorders.

Benefits will begin to accrue after the end of the waiting period. Most individual disability policies and group long-term disability plans have a waiting period (e.g., 90 days or 180 days), which is the amount of time you must meet the definition of disability before benefits begin to accrue. When you choose individual disability coverage, consider how long you can manage without a paycheck. If you have significant savings, you may be willing to choose a longer waiting period. The longer the waiting period, the lower the premium. Under most group plans, generally the employer selects the waiting period.

With individual disability income policies, you can select the maximum time your benefits will be paid, subject to the insurer's underwriting guidelines. With most group disability plans, the employer selects the maximum duration of benefits. The most frequently offered maximum benefit periods are two years, five years, and to age 65. Policies with shorter maximum benefit periods will have lower premiums.

It's generally recommended that disability coverage be chosen to replace 60 to 80 percent of after-tax income. If you purchase disability insurance with after-tax dollars, your benefits will usually be income tax free. If you have group disability insurance that is paid for by your employer, however, benefits will generally be taxable.

Small business owners have special concerns in addition to protecting their income with disability insurance and should consider obtaining professional advice about disability policy options that can help protect a business if an owner becomes disabled (e.g., business overhead expense insurance and disability buy-sell policies).

To estimate the benefit amount you would need if you became disabled, ask yourself how much monthly income would cover your living expenses. Would these expenses go up or down if you became disabled? These expenses must be carefully considered. Work-related expenses may go down. Medical expenses may increase. Education expenses may increase as you retrain. Some insurance policies may have premium waivers. By considering all these factors, you should be able to come up with an appropriate amount.

To get an estimate of how much disability income insurance you would need to maintain your current standard of living, visit our Disability Needs Calculator.

Social Security. Social Security disability benefits may be available to eligible individuals prior to age 65, depending on your income and how long you have been paying Social Security taxes. However, to qualify for Social Security benefits, you generally must be unable to engage in substantial gainful activity by reason of a physical or mental impairment that can be expected to result in death or last for at least 12 months. Social Security disability benefits are not intended for temporary conditions. You should also note that Social Security's disability rules are different from those of other government or private programs. For more information on Social Security Disability benefits eligibility criteria, you may visit the Social Security Administration's website at www.ssa.gov.

There are several ways to obtain disability income coverage. Some companies provide their employees with group coverage; check with your benefits specialist where you work to find out if you have or are eligible for coverage. In addition, various associations (e.g., AARP) offer disability income benefits for members. You may also purchase an individual disability income policy yourself. Rates vary according to your age, health, occupation, and the policy features you choose. Here are some smart shopping tips with respect to an individual disability income insurance policy:

Compare policies from at least three different insurers. Compare price, the definition of disability, and whether the policy is noncancelable or guaranteed renewable.

Buy young. Insurance generally gets more expensive as you age. Also, as you get older, you may develop health problems that could preclude coverage.

Buy a noncancelable policy. If you have this type of policy, the company cannot change your premiums or cancel your coverage as long as you pay your premiums on time. In addition, if you purchase your policy at a younger age, you'll be able to lock in a lower premium.

Increase the waiting period. Longer waiting periods will reduce your premiums. Be sure you have enough savings to cover a longer waiting period and/or will receive extended sick pay through your employer. If you're trying to trim the cost of a policy, having benefits payable through age 65 is generally more important than a short waiting period.

Choose a financially strong insurer. Independent agencies such as Standard & Poor's and Moody's rate the financial health of insurance companies. 

You will need written proof of your disability to file a claim. Your insurer may also require medical records from your doctors concerning the details of your disability. Your insurer may also want you examined at their cost and/or may require financial information from you.

Your benefits will begin accumulating after you have been disabled for the predetermined waiting period. If you return to work before the waiting period is over, you most likely will not be eligible for benefits. Note that the premiums for your disability policy are usually waived during your disability.