Why Disability Insurance Matters

Fewer than one out of every five Americans will die before they reach age 65, but one out of every four 20-year-olds is expected to suffer a disabling condition that puts them out of work for a year or longer during their careers. And, in an average year, nearly 9 million U.S. workers — more than 5 percent of the workforce — are off the job for as much as six months, mostly because of conditions such as sickness, injury or pregnancy.

And yet, one leading insurance researcher finds that 44 percent of people have individual life insurance policies while just 29 percent own disability coverage.

It’s easier — and scarier — to imagine getting hit by a bus or crashing in a plane than to consider that you’ll develop debilitating back or knee pain, face a cancer diagnosis, or be crippled by severe depression and anxiety. But the financial fallout of a short- or long-term disability can be as bad or worse than the money issues that follow the loss of a loved one.

Academic researchers have found that the primary reasons for personal bankruptcy filings included medical bills (26 percent), lost employment (20 percent), and illness or injury, including those of family members (15 percent). In 2018, a Federal Reserve study found that almost 40 percent of all adults couldn’t pay an unexpected $400 expense without borrowing or selling something — or couldn’t pay it at all. That’s a problem, when you consider that the average long-term disability claim runs for 34.6 months.

Here are some facts about disability insurance and how it can help protect you and your family.

Disability insurance comes in two types: long-term and short-term. Both versions replace a percentage of your income when you’re unable to work. Short-term typically covers one year or less for a prolonged illness, a pregnancy, or an injury that keeps you off the job. Long-term usually kicks in once you’ve been disabled for more than six months for issues such as cancer, heart attacks, other major medical events and mental disorders.

Your choices should be based on how long you can go without income. If you’ve saved a substantial emergency fund, you might forgo short-term coverage. Other considerations include whether there’s a history of major medical issues in your family and whether you’re the family breadwinner.

Are you covered at work? About 40 percent of employers offer disability insurance, but more than one-third of workers don’t participate in those programs. Typically, this covers 40 percent to 50 percent of your salary when you meet certain conditions. Examine any policy closely to see what the benefits and exclusions would be and when the coverage applies.

Private disability insurance: If you’re self-employed or you can’t get employer-provided coverage, or if you need more coverage than your workplace plan offers, you can purchase your own disability insurance. The advantages include being able to buy exactly as much coverage as you need and being able to maintain the policy when you change or lose jobs. Also, the payments from disability insurance that you purchase on your own are paid tax-free to you, while money paid by employer plans are considered taxable income.

How it works: Disability policies include a waiting period, also called the “elimination period,” before you’ll receive any payments. Some policies take into consideration other benefits you may receive, such as Social Security disability payments, and pay the difference between those payments and the coverage cap. The benefit period defines how long you’ll receive benefits. Policies also have different definitions of what disabilities are covered and whether you can return to your own occupation or any job that matches your experience and education, while some cover your own occupation for a limited time and then limit benefits to whether you can hold any kind of job.

Other options: Disability policies can include additional features, such as:

  • Cost-of-living adjustments
  • A guarantee that the policy won’t be canceled or renewed at higher rates
  • An option that waives your policy premium once you’ve been disabled for a certain length of time
  • A rider that allows you to work part-time to reestablish yourself while still collecting adjusted benefit payments
  • Coverage for a “transitional period” while you rebuild a business or professional practice

What about Social Security benefits? Disability benefits under Social Security are approved for 34 percent of applications, with 23 percent approved initially and the rest after going through an appeals process, according to industry researchers. The waiting time is three to four months for an initial decision and more than 18 months for appeals. The average benefit in 2018 was $1,197 a month.