Disability insurance: What is disability insurance and how does it work?

Most of us insure our homes, cars, and other valuables. Few realize that our ability to earn income is our most important asset and needs the most protection when it comes to maintaining our living standard.

Disability insurance protects this vital asset. Insurance Business explains disability insurance, how it works, and who needs it most. This article can help you find a financial plan if you can't work.For insurance professionals who read our website, use this guide for disability insurance questions from clients.

Define disability insurance.

Disability insurance provides financial support if an unexpected illness or injury prevents you from working. Your employer, government, or private insurer may provide coverage.

The Insurance Information Institute (Triple-I) lists two main disability insurance policies. These are:

• Short-term disability insurance: Covers incidents immediately with waiting periods of 0–14 days and a maximum benefit period of two years.
• Long-term disability insurance provides financial protection for disabilities lasting over two years, but requires longer waiting periods, typically weeks or months. Policy coverage may extend to retirement.

Plans with short-term and long-term benefits are available. After short-term disability insurance expires, this policy provides long-term coverage. Long-term policies can be customized and include riders. However, these add-ons affect premiums.

You can also use other policies:

Work-sponsored group disability insurance: Employers usually pay premiums.

Individual disability insurance is ideal for those without employer-provided coverage and high-earners seeking additional coverage. This is transferable if you change jobs.Supplemental disability insurance: Covers gaps in short-term policies.

Disability insurance works how?

Disability insurance helps you replace your income if you get sick or injured and can't work. It can cover daily expenses. This includes:

• Groceries
• Clothing
• Utilities
• Education for kids
• Mortgage payments
• Car loan payments
• Dental and medical costs
• Recreational costs

The Social Security Administration (SSA) offers two federal disability programs in the US:

SSDI is designed for individuals who became disabled after earning sufficient Social Security work credits within a specific timeframe. SSDI benefits may apply to spouses and children.

Supplemental Security Income (SSI) provides financial assistance to individuals 65 or older with disabilities who lack income and resources.

These programs often have strict eligibility requirements. These include proving:

• Your disability is too severe to do any meaningful work.
• Your disability is expected to last 12 months or kill you.

Disability insurance covers?

Disability insurance provides coverage for injuries and illnesses not covered by workers' compensation. Unfortunately, some people think a disability is only severe conditions like paralysis from an accident or stroke.Many disabilities are caused by common illnesses. This includes:

1. Painful back
2. Digestion issues
3. Mental illness like anxiety and depression
4. Pregnancy
5. Disability insurance covers many medical conditions, but some are excluded:
6. Self-inflicted harm and illness
7. Crime-related injuries

Different policies have different coverages and exclusions, so read your policy carefully to understand what you're covered for.

Disability is what?

Each insurer defines disability differently, so policyholders must meet different requirements before coverage begins. Disability insurance companies use two main definitions.

Our insurance glossary can help you understand insurance buzzwords.

Who needs disability insurance most?

Most of us associate disability with severe accidents that cause bodily harm.However, most long-term disabilities that require significant work absences are caused by common illnesses and occur more often than you think.

A quarter of young people will experience a disabling event that will prevent them from working for at least a year, according to recent SSA data. Lack of income during that time can put families in danger.

Disability insurance isn't just for dangerous workers, as this number shows. Disability insurance is most needed by these groups:

• Supporters or sole providers
• Physically demanding workers
• Parents of minors
• Recurrent injury sufferers

Cost of disability insurance?

Disability insurance premiums depend on many factors, just like other policies. This includes:

• Younger people with more financial leverage pay lower premiums.
• Your medical history can affect your rates based on family history of certain illnesses.
• The amount of benefits you receive depends on your income and premiums.
• Benefit period: The insurer's payout time affects premiums.
• The waiting period, also known as the elimination period, is the time between becoming disabled and receiving benefits. Longer waiting periods lower premiums and vice versa.

Interested in insurance premiums across policies? Visit our comprehensive insurance premium guide.

Need how much disability insurance?

Income protection calculators are available from most disability insurance providers to help you determine coverage. Some insurers offer 40% to 80% of after-tax income.

You must balance what you can afford to pay with what you need to live on if you become disabled.

What to consider before buying disability insurance?

Triple-I recommends understanding two protection features in disability insurance plans as a policyholder. These are:

• Insurance companies cannot cancel non-cancelable policies unless you stop paying. This policy can be renewed annually without premium increases or benefit reductions.
• Coverage is guaranteed and renewable, just like non-cancelable plans. The only difference is that the insurer can raise premiums for all policyholders in the same rating class.
• Consider these other disability insurance options.
• Buy additional coverage later with additional purchase options.
• Coordination of benefits: The policy sets a target amount from all disability benefits and pays the difference not covered by other policies.
• COLA: Adjusts benefits based on the Consumer Price Index over time. Premiums rise with this feature.
• The residual or partial disability rider lets you work part-time and receive a partial disability payment.
• Premium refund: Requires the insurer to refund part of your premium if no claims are made for a policy period.

You can waive premium payments to maintain coverage without reducing benefits.

Is disability insurance advisable?

If others depend on you financially, disability insurance may be worth it. Unexpected accidents and illnesses can hurt your career. Disability insurance can help you pay your bills until you can work again.

Disability insurance facts

Disability insurance benefits, coverage, and costs are often unclear. What you need to know.

• Benefit types. Disability insurance benefits can be short-term or long-term, with “riders” available for an additional fee. Short- and long-term disability insurance replace income if you can't work, but they cover different injuries or illnesses, pay for different periods, and have different elimination periods. Some physicians may think they can use sick leave for short-term disabilities, but many employers have reduced paid sick days to the point where they'll run out before the doctor recovers. Make sure you have short- and long-term disability insurance.
• Some insurers sell “accident policies” that pay a lump sum for injuries listed in the policy a set number of times or over a set timeframe. Accident insurance covers prosthetics and motorized wheelchairs. Some policies may cover “basic dismemberment” and “catastrophic dismemberment” differently (see “Definitions”).6
• Even with short-term and long-term disability coverage and an accident policy, saving three to six months of current salary is smart, depending on how long your plan takes to start paying benefits.7

Short-term vs long-term

Temporary, less serious injuries or illnesses may prevent work for weeks or months. Permanent, more serious injuries may prevent work for months or years. Full recovery expected?YesNoWait time before payments startUsually 14 days after disability30 days to two years after disability*Duration of benefitsSix months to two yearsTwo to 10 years, or up to 65 in some cases

Plans with longer wait times have lower premiums, but beneficiaries must live off their savings if their short-term disability benefits don't last the elimination period.

Potential for multiple policies. Disability insurance policies typically cover 60% of a private practice or academic physician's guaranteed base salary, not clinical productivity pay. If your employer increases your clinical productivity-based salary, you may need more disability insurance to maintain the same reimbursement. This should be done ASAP. Insurance rates rise with age due to disability risk.

If your primary disability insurance doesn't cover 100% of your income, consider adding a policy. You'll still be covered if you switch jobs if you have at least one private (personal) policy and an employer-provided (group) policy. Policy payments made with after-tax dollars are not taxable, but employer- or organization-provided group policy benefits are. Physicians who receive most of their long-term disability income from private policies are better compensated.

Correct coverage. The best disability insurance for doctors is occupation- and specialty-specific. These policies allow disabled doctors to receive 100%, or close to 100%, of their current salary, even if they can work a lower-paying job. The “own occupation” policy is different from the “any occupation” policy. Key words: “You are not able to perform the material and substantial duties of your occupation, even if you are gainfully employed in another occupation.” A newly disabled physician who takes a lower-paying job will still have that salary subtracted from disability benefits, but the combination should keep the physician financially whole. With a “any occupation” policy, a doctor who can switch jobs may lose benefits.

Own-occupation coverage may be base or rider-only. Only six companies offer own-occupation disability insurance for physicians: Berkshire Life (a Guardian Company), Standard Insurance Company, Principal, Ameritas, MassMutual, and Ohio National.7 Even so, few own-occupation policies provide full benefits to disabled physicians who can still practice their specialty, so consider buying a policy or rider with “residual disability” benefits (see “Definitions”). After returning to work after total disability but not yet reaching full earning potential, residual disability benefits usually include a monthly “recovery benefit” to fill the income gap. Physicians should consider the recovery benefit amount, when it is activated, how long it is guaranteed, and whether they must return to work.

Consider other riders. In 2020, disabled people could no longer avoid student loans. Physicians with high student loan debt should consider adding a rider to their disability insurance policy to pay off all their loans if they become totally disabled. These riders benefit early-career disabled workers because they have minimum and maximum monthly benefits and pay-off periods that start when the policy is issued, not when the benefit period is activated.

Residents, fellows, and other early-career physicians should consider buying a “future increase rider” to increase their coverage as their income grows without having to buy a new policy and go through underwriting (see “Definitions”). It may also allow them to increase their coverage annually (until a certain age), after a major life event like marriage or childbirth, if they get a raise, or if they lose employer-provided disability insurance. Additional coverage is limited, and premiums rise with benefits.

Employer-provided disability insurance rarely includes a COLA. Physicians should consider COLA riders if needed. Physicians' employer-provided disability insurance premiums may include it.

Some disability insurance companies offer retirement protection plans that continue your monthly retirement account contributions if you become disabled. This money is invested in a trust until 65, when it starts paying out. Many carriers offer monthly benefits up to $3,800 for disability insurance policies. Because the insured is the beneficiary, trust earnings are usually taxable. Consult an accountant or tax attorney to see if this makes financial sense.

Cost-affecting factors. Disability insurance costs doctors 1% to 4% of their income and 2% to 6% of their monthly disability benefit. Because women have more and longer-lasting disabling conditions than men, premiums rise with age and are 40% higher for women. Women can avoid higher premiums by choosing unisex plans.

Those with preexisting medical conditions, tobacco use, excessive alcohol use, or abnormalities found during an insurance exam and bloodwork pay more. Occupation also increases disability risk. Insurance companies rate professions on a risk scale of 1–5 or 1–6 based on workplace hazards, disability return rates, and claims experience. Surgical and interventional specialists are considered higher-risk than family physicians, but risk classes vary by insurer, so get quotes from multiple carriers. Additional riders, annual income, practice location, benefit length, and elimination period length also affect cost. Benefits should be tied to job duties, but doing so may raise premiums.