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Back to Basics: Disability Insurance

Back to Basics: Disability Insurance

May 03, 2023

Nobody likes to imagine the worst, but what would happen if you become disabled and can no longer work? For most people, this could mean they no longer have a source of income. Moreover, their ability to provide for themselves or their families and pay the bills is drastically reduced. Disability insurance can be the solution in this situation.  

What Is Disability Insurance?  

Disability insurance is a cover that offers monthly income if you become disabled and can't work due to an injury or illness. In simpler terms, it’s insurance for your income. Like auto insurance covers your car's damage costs, disability insurance covers you if your income is affected due to a disability.  

It’s essential to note that the definition of disability differs between policies. Some covers include conditions like mental health impairments, while others will only cover accidents and injuries.  

Types of Disability Insurance  

There are 2 primary categories of DI: 

  • Short-term DI 
  • Long-term DI 

As the name suggests, short-term disability (STD) offers benefits for a brief period of disability, usually from 3 months to up to 2 years. On the other hand, long-term disability (LTD) provides coverage for extended periods, typically from two years and beyond.  

Short-term DI is common in workplaces as a group cover. It can be a mandatory requirement (employee-paid) or voluntary (employer-paid).  

LTD insurance is usually taken by high-income earners or self-employed professionals as it’s more advantageous and costlier. The insurance covers the person's financial needs if they become disabled even after retirement.  

Benefits of Disability Insurance  

The primary benefit of DI is that it provides you and your family financial security in case of a disability. In addition to this, there are other benefits:  

  • It replaces lost wages up to a specified percentage or amount.  
  • It offers coverage if you become disabled due to an accident or illness 
  • You can pay the premium with pre-tax dollars, which helps in reducing your taxable income 
  • If you’re self-employed, it can be used to offset expenses like rent or mortgage payments and other bills  
  • It ensures that you will have some form of income even if a disability prevents you from working 

Common Terms in Disability Insurance  

Group Disability Insurance: This is a cover provided by an employer to their employees. It typically covers all the employees and offers limited coverage since the employer pays for it.  

Individual Disability Insurance: If you’re self-employed or own a business, you can purchase an individual disability insurance policy. The coverage and benefits are more comprehensive as compared to group DI.  

Own-Occupation: This type of DI policy covers an individual if they are disabled and unable to work in their specific occupation. For example, if a surgeon becomes disabled and can't operate due to an accident, they will still be covered by their policy.  

Any-Occupation: When a disability prevents you from working in any occupation, an any-occupation policy ensures that you will receive benefits. If you can work in another profession, you will not be eligible for the benefits.  

Social Security Disability Insurance (SSDI): This type of disability insurance is provided by The Social Security Administration (SSA). The coverage is available to workers who have earned enough work credits and can no longer work due to an accident or illness.  

Conclusion  

Having disability insurance provides you with financial security in case of a disability. Ultimately, it assures that you will have some income even if an injury or illness prevents you from working. It's important to understand the different types of coverage, terms, and benefits associated with disability insurance to make an informed decision.  

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