How Does Disability Insurance Actually Work?

Picture of woman with words: How does disability insurance actually work?Disability insurance provides critical financial protection that is very different from other insurance products. Millions of working Americans don’t have it, and many don’t fully understand what it protects.

A 2017 report from LIMRA revealed that 65 percent of respondents thought that most people need disability insurance. Yet only 48 percent thought they personally needed it, and a mere 20 percent said they actually had it. Why the disconnect? 

According to the Social Security Administration, more than one in four of today’s 20-year-olds will be out of work for 12 months or more for a variety of reasons before they reach normal retirement age. None of us like to think about this risk, but it’s a very real one.  

What is disability insurance?

Disability insurance pays you a portion of your salary when you need to miss work due to an illness, injury, or having a baby. If you are single, disability insurance is the second most important insurance you can carry after health insurance. And if you have a family that depends upon you, this insurance gives you an income stream if you need to leave work.

Approximately half of U.S. workers in private industry have disability coverage included in their employee benefits, with at least part of the cost paid for by their employer. The other half can purchase coverage on an individual basis or through a voluntary benefits plan in the workplace. 

Here are the various types of disability insurance and how they work:

Short-term disability (STD)

Short-term plans usually protect your income for between three days and six months — although some policies offer coverage for up to two years. STD plans typically replace between 60 and 70 percent of your pay, depending on the policy.

When you choose a plan, be aware of the waiting period, also known as the elimination period. This is the time between you being diagnosed with an illness, injury or having a baby, and the payments kicking in.

Long-term disability (LTD)

Long-term disability insurance protects your income if you need to miss work for longer than three to six months. It usually covers 40 to 70 percent of your income. The time your coverage pays benefits will range depending on your policy. It can be for a specific period — ranging from two to five or ten years — or until your Social Security retirement age.

The waiting period for most LTD policies is three or six months — so you’ll need a plan to cover costs before the payments begin (usually this time is covered by your STD plan or your savings.) If your employer pays your STD or LTD premiums, your benefits are taxed.

Types of plans

STD and LTD are typically offered in three ways:

  1. Employer-paid plans: These are paid for entirely by your employer.
  2. Worksite or voluntary plans: As the employee, you pay the premium. However you can tap into more affordable rates this way. You can also take these policies with you when you change jobs.
  3. Individual plans: These are purchased to give you the best possible income insurance, or to a supplement a plan you already have through your job or via a membership organization such as the National Education Association (if you work in education). If you collect benefits under an individual plan, your income is tax-free so your monthly payments will be that much higher. To learn more about individual disability insurance, speak to your financial advisor, check out* or talk to one of the member companies of The CDA.

Social security disability insurance (SSDI)

The Social Security Administration provides Social Security disability benefits for eligible individuals who have a disability that lasts for one year or longer. Many applicants are denied due to a lack of work history, lack of medical evidence, the temporary nature of their condition, or the fact that people may still be able to work outside of their profession.

The average SSDI benefit in January 2018 was $1,197 a month. It generally takes three to five months from time of application to get an initial decision. Approximately one third of claimants are approved: 20 to 25 percent at the initial application stage, and the remainder after a reconsideration or appeals process. In 2017, there was a backlog of more than a million appeals cases, and the associated processing time averaged 18 months.

How much protection do I need?

Start by assessing your income and expenses. How much cash would you need to cover your basic daily living costs like the mortgage, groceries, car payments, student loan debts, and so on? Most people are advised to cover 60 percent of their normal income. Next, how long you could go without a paycheck? Do you have enough savings to cover you for three months? Use our calculator to figure out your costs and use our Personal Financial Security Plan to build your strategy.

To learn more about disability insurance and the steps you can take to discuss it with HR at your workplace or find a plan as an individual, visit *The CDA is an affiliate of Policygenius.