Why is disability insurance important? Broadly speaking, insurance exists to protect our most valuable assets — like homes and cars– from the unexpected. But what about income? What if you suddenly become disabled due to cancer or a severe accident and can’t work?
This is where disability insurance comes into the picture. It helps keep enough money in your pocket to pay bills and regular expenses until you can work again. In short, disability insurance is crucial because it protects your most valuable asset, income.
What are my chances of becoming disabled?
The risk of having a disabling injury or illness during your working years may be greater than you think. Here are some statistics to consider from the Council for Disability Awareness:
- Just over 1 in 4 of today’s 20-year-olds will become disabled before they retire.
- Over 61 million Americans are classified as disabled. More than 50% of these Americans are in their working years (aged 18-64).
- The average healthy 35-year-old female has a 24% chance of becoming disabled for 3 months or longer during her working career; a 38% chance that the disability would last 5 years or longer.
- The average disability for a healthy 35-year-old female lasts 82 months (over 6 ½ years).
- The average healthy 35-year-old male has very similar statistics as his female counterpart with the only difference being a 21% chance instead of 24% in regards to being disables 3 months or longer.
In reference to the statistical examples above, it’s not a stretch to think that many 35-year-old persons have families. If you suddenly became disabled, whether short or long-term, could your family maintain their standards of living? What about the goals you’ve been working so hard toward?
Think about your current lifestyle needs and future goals. When the paychecks stop, what gets sacrificed first?
- Home maintenance
- Child-related expenses
- Insurance premiums
- College tuition
Your income is your most valuable asset. It supports the lifestyle you and your family enjoy now and the financial goals you work hard to achieve.
Who needs disability insurance?
You don’t need to work in a high-risk job to need disability insurance. Anyone can become disabled by illness or accident.
1. Family providers need disability insurance.
If you work outside the home and become disabled, a long-term disability can have a significant impact on your family’s standard of living. Disability insurance can ensure your family has what they need so you can focus on getting better.
2. People with physically demanding jobs need disability insurance.
While you may pay more than someone who doesn’t work a physically demanding job, your chances of getting disabled are higher. Being on your feet day in and day out takes a toll on the body.
Disability insurance can help protect your savings should you find yourself suddenly unable to lift, walk, or stand.
3. Parents need disability insurance.
While it may be difficult to explain to your small children why you can’t play tag because of a disability, at least disability insurance will make sure you can still feed them and buy them essentials they need.
4. People with recurring injuries need disability insurance.
Do you have persistent injuries that always seem to pop up at the most inconvenient times? Disability insurance is a safety net you can rely on if you’re unsure when one of these injuries may prevent you from working long-term.
Let’s look at some reasons people give as to why they think they don’t need disability insurance.
“I don’t need disability insurance because…”
“I can use my savings to replace lost income.”
Are you actually saving just in case you become disabled, or are you saving for a new house? Retirement? Child’s college? If you use your savings to replace income, what happens to those other goals?
Even if you save 10% of your salary, a one-year disability could eliminate many years of savings.
“I have enough disability coverage though my employer.”
Group long-term disability insurance is a great start, however, it typically only covers 60% of your gross income and the benefits are often taxable. After taxes, you’re left with approximately half of your gross income. Is that enough for you and your family to live on?
“I could borrow money from family and friends.”
The amount of money needed may be quite substantial and required for a long period of time.
“I could borrow money from the bank.”
As someone who is unable to work, how will you afford the loan repayments?
“Social Security or Workers’ Compensation will take care of me.”
The Social Security Administration denies about 65% of all claims and pays benefits for total and permanent disabilities only. And even if you qualify for Social Security disability insurance (SSDI), it isn’t enough. The average disabled worker on SSDI receives $1,358 per month.
Workers’ Compensation benefits are limited to only occupational diseases or injuries that occur during the course of employment.
How does disability insurance work?
In order for disability income insurance benefits to be paid, you must meet your policy’s definition of disabled. The strictness of the definition can vary across plans.
There are three common definitions:
- Own-occupation disability
- Modified own-occupation disability
- Any-occupation disability
Under the own-occupation disability insurance definition, you will receive benefits if you are unable to work in your “own occupation,” regardless of whether you find employment in another profession. This is the most common definition used and more flexible for the policyowner.
Pete is a surgeon who enjoys doing home improvement projects in his free time. One day, Pete’s hand slips while using his table saw and the accident requires a finger amputation. Pete can no longer perform surgeries, but may be able to find work in another medical specialty or even work outside the medical industry.
Pete cannot perform the substantial duties of his own occupation as a surgeon. With an own-occupation disability insurance policy, he would receive full benefits, regardless of whether he chooses to work in another medical specialty or another profession altogether.
Modified Own-Occupation Disability
This definition is similar to own-occupation, but full benefits are only paid if you aren’t working. If you choose to work then benefits from the policy are proportionally reduced. This definition can also be referred to as “own occupation if not working”.
Cassie is a paralegal at a law firm. At a routine wellness checkup, she was diagnosed with stage II breast cancer.
Cassie cannot work due to her treatment schedule and nausea side-effects. Her disability insurance policy provides her full benefits.
After a few months, her doctor says she can go back to work part-time. Her disability benefits continue but are reduced by income she is now receiving for work.
Under the any-occupation disability insurance definition, you only receive benefits if you are unable to work in any job that is reasonably suitable for you based on your education, experience, and age. In other words, if you are still capable of working, even at a lower-paying job, an any-occupation policy would not pay.
John is a dentist who enjoys doing home landscaping projects in his free time. One day, John’s hand is accidentally crushed under a cinderblock while building a retaining wall and it causes nerve damage. John can no longer carry out precise dental work, but may be able to find work in another medical specialty or even work outside the medical industry.
Because John is still capable of working in the medical field, if he had an any-occupation disability insurance policy, he would not receive any benefits.
How do disability benefit payments work?
Monthly disability benefit amounts typically range from $500 through $20,000—maximum limits depending on your occupation and salary. These benefits are paid tax-free if you pay the premiums yourself (versus an employer) with after-tax dollars.
There are specific provisions to be aware of in your disability insurance policy.
Disability Insurance Policy’s Waiting Period
If you become disabled, you will begin to receive the benefits laid out in your policy. There is often a waiting period before payments begin, however.
Common waiting periods are 30, 60, 90, 180, and 365 days. A few policies are available with a 0-day waiting period but this is only for disabilities that occur from an accident.
Disability insurance policies with a shorter waiting period have higher premiums. If you have the means to pay for typical living expenses for a few months in the event of a disability, you can save money by purchasing a disability policy with a longer waiting period.
For example, the annual premium for a policy with a 180-day waiting period can be less than half the cost of a policy with a 30-day waiting period.
Disability Insurance Policy’s Benefit Period
Just as disability insurance policies have different waiting periods, they also have different benefit periods. A benefit period is the duration of time in which an insurance company will provide funds to an individual once he or she becomes disabled.
Benefit periods can include one year, 2 years, 3 years, 5 years, 10 years, to age 65 or age 67, or even the insured’s lifetime. Not all insurance companies offer all of these options.
Disability benefits will continue as long as you are disabled according to the policy’s provisions. The insurance company will most likely require proof of continued disability if the duration is long-term. The benefits from a disability policy cease once you are no longer considered disabled.
The longer your benefit period, the higher the premium. For example, the premiums for a policy with a 2-year benefit period may be 40-50% less expensive than a policy with a benefit period that goes until age 67.
How much does disability income insurance cost?
The cost of a disability income insurance policy varies by person. It can cost as little as 1% of your income.
The cost of your policy will be determined through underwriting.
Disability Insurance Underwriting Basics
Here at Quotacy our world revolves mainly around life insurance. However, life insurance and disability insurance are similar in the way that they both are made to protect income.
» Compare: Term life insurance quotes
Life insurance protects your loved ones from financial difficulties in the event of your death and disability insurance protects you, and in turn your loved ones, from financial difficulties in the event of a disability that prevents you from working. They are not underwritten the same though.
Life insurance underwriting involves mortality risk, basically the assessment of medical impairments and how they can attribute to premature death. Disability insurance underwriting involves morbidity risk, basically the assessment of medical impairments that can result in prolonged disability. As an example, a painful back isn’t going to cause a person’s death, yet back problems are a major cause of disability.
There are three levels of disability insurance underwriting:
For disability insurance, classifying an applicant in the correct occupation class is critical in determining the proper benefit amount and premium rate. When determining occupation classification there are five major factors:
- Job duties
- Dual occupations
Common questions asked when applying for disability insurance include:
- What is your typical day like?
- If you work any manual duties, what are they and what percentage of time do they represent?
- Do you have ownership? If so, how many employees?
- Do you work multiple jobs?
- How many hours do you work?
Higher occupation classes typically perform fewer manual duties.
The table below shows some examples of the different occupation classes.
|A||Shipping and receiving clerk, press worker|
|2A||Building inspector, medical assistant|
|3A||Administrative assistant, bookkeeper, graphic designer|
|4A||Landscape architect, paralegal|
|5A||Pharmacist, small animal veterinarian, computer engineer|
|6A||Attorney, CPA, engineer|
Your job title doesn’t necessarily automatically put you into a certain classification. Two people can have the same job title, but different occupation classes. Consider the table below.
|Who would have the higher classification?|
|Jamie - President of Johnson Construction||Kelly - President of ABC Construction|
Jamie’s everyday duties include little to no manual labor, so Jamie would be in a higher occupation class because Jamie is at less risk of developing a disabling impairment such as a sprained back.
An applicant’s medical history is crucial to underwriting disability insurance. Common medical conditions such as back disorders, stress/ anxiety, or high blood pressure are unlikely to cause an application to be declined, but you may have higher premiums or a reduced benefit amount.
Certain medical conditions, however, may result in a decline of coverage. If you have been diagnosed with any of the following medical conditions, be aware that you may not be able to obtain individual coverage.
- Bipolar disorder
- Chronic fatigue
- Juvenile diabetes
- Kidney disease
- Heart attack
- Hepatitis C
- Multiple sclerosis
- Rheumatoid arthritis
- Systemic lupus
Not all disability insurance carriers underwrite the same, so it doesn’t hurt to apply. The severity, treatment, and amount of time since you have been diagnosed are all factors the underwriters will consider when evaluating an application.
Sometimes instead of declining an application altogether based off the history of a specific medical condition, an underwriter will offer to approve the application with an exclusion rider that states no coverage will be provided for a disability resulting from the specified condition.
Disability insurance helps to replace lost income, so it deems necessary to document the financials of an applicant to determine a benefit amount.
Disability insurance will only cover earned income. For example, income from sources other than active work efforts, such as dividends or rental properties, is considered unearned income and is likely to continue accruing even in the event of a disability. So, it may be necessary to prove to the insurance company what your earned income is by providing copies of current and prior years tax returns.
These factors also determine the cost of your long-term disability insurance:
- How long your waiting period is
- How much of your salary is replaced
- How long your benefits are paid
This table shows example pricing for individual disability insurance policies for a non-smoking 35-year-old male and female each making $50,000 in a 3A occupation class.
|Policy Features||Comprehensive Coverage||Moderate Coverage||Basic Coverage|
(59% of current income)
(44% of current income)
(36% of current income)
|Waiting Period||90 days||90 days||180 days|
|Benefit Period||To age 65||To age 65||5 years|
|Cost per Month||Male $99.13|
Advantages of disability income insurance:
- While life insurance protects the family should you die, disability insurance protects the family should you lose the ability to work.
- Disability insurance helps provide security. It pays a monthly income to help protect the family home, savings accounts, retirement funds and other assets should you become disabled.
- Monthly benefits are received tax-free.
- You own the policy and it will stay in place throughout your working years as long as the premiums are paid.
Consider the effects a disability could have on you and your family’s lives, your standard of living, and savings.
Owning an individual life insurance policy in addition to a disability insurance policy is a smart financial plan. These policies provide income replacement whether you become disabled or die unexpectedly. Learn more about life insurance on our term life insurance guide.
Lynch, Kevin M. and Glenn E. Stevick Jr. Fundamentals of Insurance Planning, 2015.