What is Disability Insurance and Why You May Need It

None of us can predict the many curveballs we'll be tossed over the course of a lifetime. That’s in part what makes our lives so wonderful—and sometimes more than a bit daunting.

Just as we should always be prepared to take advantage of opportunities that suddenly appear before us—whether personal, financial, or professional—it's also essential to do everything in our power to protect ourselves and our loved ones in the face of potential challenges.

One tool for this is disability insurance, which provides a stream of income in the event that you can’t work due to an illness or injury, typically replacing a portion of your income during the period in which you are disabled.

Ready to get started? The following primer can help.

Where and How Can You Get Disability Coverage?

The most common ways to purchase a disability policy are via the benefits plan offered through your employer or by purchasing a private policy from an insurance company.

With regard to the former, many employers offer both short and long-term disability coverage through their employee benefits menu that includes things like health insurance, life insurance and a host of others. In some cases, short-term coverage might be paid by the company with the employee paying the cost of long-term coverage. These are group policies so the coverage will be pretty standardized across the board.

Those who do not have the option to buy disability coverage either via their employer or some other type of group offering—a professional association, for example—will need to seek out a private insurance company policy. This coverage will generally be more expensive than group coverage, but can be tailored a bit more to your individual needs. The coverage isn’t subject to cancellation if you change jobs, but you will be subject to health underwriting standards that you likely wouldn’t have to navigate with group coverage.

What are Typical Disability Policy Features?

Disability insurance is not a one-size-fits-all proposition. Here are a few important distinctions to be aware of as you research a potential policy:

• Short-term disability policies typically cover policyholders who are unable to work for periods ranging from three to six months.
• Long-term disability policies typically cover periods of disability that last longer than six months.
• Definition of disability defines which types of injuries, illnesses, and other conditions will be considered a disability under a given policy. Beyond this, the definition of disability can also determine if you will be required to work—even in an area unrelated to your prior occupation—in order to receive some level of payment as your condition permits. This will vary based upon the policy and the issuer of the policy. Specialized professionals such as doctors or attorneys, for example, will often want to obtain a policy that defines disability as an inability to work in their own occupation.
• Elimination period defines the waiting period before which coverage kicks in. The longer the elimination period, generally the lower the cost of the policy all else being equal.
• Percentage of income to be replaced. A typical replacement percentage is 60% of the policyholder’s income, but this can vary especially with privately issued policies.
• Type of income covered is a key consideration as well. Some group policies offered via employer benefit plans may not cover all types of income earned—such as bonuses and commissions. This can create a major gap for senior-level executives and employees in areas like sales for whom a high percentage of their compensation might derive from such variable compensation sources.

Pros and Cons of Group Coverage and Individual Policies

If you’re choosing between group coverage and an individual policy, the following breakdown of the pros and cons of each may help clarify the decision.

Pros of Group Coverage:

• Group coverage is often less expensive than purchasing private disability insurance. Some of the cost might even be covered or subsidized by the employer.
• There is no medical exam required for policies offered by your employer. You will need to adhere to the timing and other guidelines set forth for the employer’s open enrollment period.

Cons of Group Coverage:

• The definition of disability may be so broad as to require you to work at any sort of job can you reasonably perform in order to maintain some or all of your benefit.
• Coverage is not portable if you leave the employer.
• Some types of compensation might not be covered by the policy.

Pros of an Individual, Private Policy:

• Many policies have a much narrower definition of disability. Which means that if you can’t perform your own occupation you will not be required to take any sort of job you can reasonably perform in order to maintain your benefit.
• Variable compensation such as bonuses or commissions may be covered when figuring the percentage of lost income to be replaced.
• If you are drawing Social Security Disability Income (SSDI) benefits, your private policy may not reduce your benefits by the amount of SSDI you are receiving. This often happens with group policies through your employer.

Cons of an Individual, Private Policy:

• The cost of the policy will likely be higher than for a group policy offered through your employer.
• You will have to pass a physical exam as a condition of coverage.

What About Social Security Disability Coverage?

Yes, Social Security does offer disability coverage—a great benefit option…in theory. The reality, however, is that some two-thirds of applicants are rejected due to the strict requirements and complicated application process.

A Final Thought

The bottom line? Unpleasant though it may be to ponder, the fact is you—like anyone else—could find yourself disabled one day. Having proper disability coverage can be the difference between maintaining your lifestyle in the event of a disability or suffering a severe financial setback. And, once in place, you can take that newfound peace of mind forward with you into all your other endeavors.