What Is Disability Insurance and How Does It Work?

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Let’s say you suddenly fell ill or sustained an injury that prevented you from working and earning a paycheck. Would you be able to keep yourself afloat with the money in your emergency fund for three months, six months, 12 months or even longer?

If the answer to that question is no, then you need to think about getting a disability insurance policy in place.

Understanding Disability Insurance

Nobody likes to think a serious illness or injury will strike them. But the reality is that it happens — in spite of how young and healthy you believe yourself to be.

In fact, more than one in four of today’s 20-year-olds are expected to be unable to work for at least 12 months at some point leading up to retirement. That’s according to the Council for Disability Awareness (CDA).

It’s in those kinds of situations where disability insurance steps in to protect your income when you can’t otherwise earn a paycheck. It can also reimburse lost income.

“A lot of people expect Social Security to take care of them, but it’s very difficult and very time consuming to qualify for the government’s disability insurance,” money expert Clark Howard says. “In the meantime, your life and its bills go on. That’s why having disability insurance is a must.”

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What Is Disability Insurance?

Disability insurance is an insurance policy that will pay you part of your income if you’re unable to work for a period of time because of illness, injury or accident.

At its core, disability insurance is income insurance. It’s a policy that makes sure money keeps coming into your household even if your paycheck temporarily stops because you’re laid up. You can either qualify for short term disability insurance (for temporary disability) or long term disability insurance (for total disability).

In reality, disability insurance covers far more than just the typical slips, trips, bumps and bruises of life.

For example, it steps in when you’re pregnant and get doctor’s orders for bed rest, or when you get a cancer diagnosis and need immediate treatment like chemotherapy or radiation that wears you down.

So, it covers a lot more than just back pain or a broken arm. In fact, here’s a list of the five most common reasons for long-term disability claims, according to the CDA. Common ailments that trigger the disability insurance benefits may include:

  1. Musculoskeletal disorders (aka pain in back and joints)
  2. A diagnosis of cancer and the resulting treatments
  3. Pregnancy complications
  4. Mental health challenges
  5. Accidental injuries (fractures, sprains and strains of muscles and ligaments)

The benefits of short term disability insurance and long term disability insurance usually vary on a case-by-case basis.

How Does a Policy Work?

There are two types of disability insurance:

  1. Short-term disability income insurance
  2. Long-term disability (LTD) income insurance

Short-term policies step in for periods of up to six months when you can’t work. They typically pay some 60% to 80% of your pre-tax salary to approximate your net take-home salary.

LTD policies often pay 60% to 70% of your income. Common policy periods are two years, five years or 10 years. Some policies may continue paying until you reach the traditional retirement age.

The average claim period for a long-term policy is around 34 months, according to CDA.

Who Should Get Disability Insurance?

Mostly everyone who earns a living should have disability insurance! There are three main ways people get disability insurance:

  1. At work, with premiums either paid by the employer or the employee
  2. Through a trade association or college alumni group
  3. Purchased by individuals on the open market

Too often, people will skip buying disability insurance if they don’t get it through work. Their rationale is that Social Security will help them if needed.

But with the average Social Security Disability Insurance (SSDI) benefit being just $1,234 a month, that barely puts you above the poverty line. Plus, it’s very hard to qualify for SSDI.

Is The Disability Insurance I Get Through My Employer Enough?

Clark Howard says getting disability insurance through work is acceptable for most people.

However, we should note that one of the big drawbacks with group policies through an employer is that they lack portability. That is, you can’t take your disability coverage with you if you switch jobs.


For that reason alone, you may want to consider buying your own disability coverage away from your current employer. What you don’t want is to find out that you’re uninsurable because of age or sickness when you suddenly decide you do want to get disability coverage down the road!

Another consideration with group policies is the tax angle. When your employer pays the premium, as is often the case with group policies, the benefits are taxable. So that ultimately reduces your benefit when you need to file a claim.

If, however, you purchase your own policy, then the benefits aren’t taxable. You receive the full monthly benefit tax-free.

How Do I Shop for Disability Insurance?

Artificial intelligence and algorithms have made applying for disability coverage online very fast and easy. Here at Team Clark, there are a couple of sites we’re familiar with that you can use to shop:

The key is to get more than just one quote. In fact, you may also want to find a broker who can give you additional quotes from multiple providers. If you don’t know one, try getting a recommendation from a fee-only financial adviser through Garrett Financial Planning Network.

Whatever policy you ultimately decide to get, it should be underwritten by an insurer that has an A+ or A++ rating from A.M. Best. Those ratings signify high financial strength. And that’s a good indicator the company will be around down the road to make good on your disability claim if you need to file for benefits.

TIP: A disability claims consultant can help you make sense of the policy terms before you sign on the dotted line. To find one, Google ‘disability claims consultant’ in your area and pay attention to the reviews.

Final Thought

Disability insurance is one of those things you hope you never need to draw on. But you’ll be grateful for the protection it offers if you do need it. So getting a disability policy in place — either through your employer or on your own — is a smart financial move.

“I have a hard time getting people to buy life insurance, let alone disability insurance,” Clark says. “But the reality is you want both life insurance to protect your loved ones and disability insurance to protect both yourself and your loved ones.”

Meanwhile, if you want to brush up on the basics of life insurance, read our article What Is Term Life Insurance and Should I Buy It?

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