Disability Insurance: Why You Need It and How to Get it

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The chance of missing months or years of work because of an injury or illness may seem remote, especially if you’re young and healthy and you work at a desk.

But more than one in four 20-year-olds will experience a disability for 90 days or more before they reach 67, according to the Social Security Administration.

“You never think it’s going to be you,” says Carol Harnett, president of the Council for Disability Awareness, an insurance industry group.

One reason people shrug off the risk is they think about worst-case scenarios, such as spinal cord injuries leading to quadriplegia or horrific accidents that result in amputation, Harnett says. But back injuries, cancer, heart attacks, diabetes and other illnesses lead to most disability claims.

“The questions people have to ask are, ‘What would you do if you couldn’t work? How far could you go without a paycheck?'” Harnett says.

There are two main types of disability insurance — short-term and long-term coverage. Both replace a portion of your monthly base salary up to a cap, such as $10,000, during disability. Some long-term policies pay for additional services, such as training to return to the workforce.

Short-term disability insurance

• Typically replaces 60% to 70% of base salary
• Pays out for a few months to one year, depending on the policy
• May have a short waiting period, such as two weeks, after you become disabled and before benefits are paid.

Long-term disability insurance

• Typically replaces 40% to 60% of base salary
• Benefits end when the disability ends. If the disability continues, benefits end after a certain number of years or at retirement age.
• A common waiting period is 90 days after disability before benefits are paid

Disability policies vary in how they define “disabled.” Some policies pay out only if you can’t work any job for which you’re qualified. Others pay out if you can’t perform a job in your occupation. Some policies cover partial disability, which means they pay a portion of the benefit if you can work part time. Others pay only if you can’t work at all.

Here are ways to get coverage:

• Sign up for employer-sponsored coverage at work. Most employers that offer disability insurance pay some or all of the cost of premiums. Five states provide or require employers to provide short-term disability benefits, according to the Society for Human Resource Management: California, Hawaii, New Jersey, New York and Rhode Island.
• Buy disability insurance through the workplace. Some employers don’t pay for disability coverage but offer it as a voluntary benefit. This lets employees buy coverage through the employer’s insurance broker at a group rate.
• Buy disability insurance through a professional association. Many professional groups offer members coverage at group rates.
• Buy an individual disability insurance plan. You can get it from an insurance broker or directly from an insurance company. Big sellers of individual disability insurance include Guardian, MassMutual, Northwestern Mutual and Principal. Most individual disability policies sold are for long-term coverage, although some companies also offer short-term policies.

Consider buying a policy if you don’t have any or enough disability coverage at work or are self-employed. Employer-sponsored disability insurance usually pays only a portion of your base salary, up to a cap. It’s a good idea to supplement that coverage if your salary far exceeds the cap or you depend on bonuses or commissions.

An insurer will consider other sources of disability insurance to determine how much coverage you can buy. Generally, you can’t replace more than 75% of your income from all the coverage combined, Hoffman says.

Buying your own policy lets you:

• Customize the coverage with extra features, such as annual cost-of-living adjustments
• Choose the insurance company with the best offerings
• Keep the coverage when you change jobs. Employer-paid coverage ends when you leave the company. (You might be able to take the coverage if you pay the full premium for disability insurance offered through the workplace.)
• Control the disability insurance. The coverage stays intact as long as you pay for it. But employer-sponsored coverage will end if the employer decides to stop providing disability benefits.
• Collect benefits tax-free if you become disabled. If the employer pays for the coverage, you must pay taxes on the benefits.

The annual price for a long-term disability insurance policy generally ranges from 1% to 3% of your annual income, according to the Council for Disability Awareness. A variety of factors affect the cost.

• Your age and health: You’ll pay more the older you are and the more health problems you have
• Your gender: Women usually pay more because they tend to file more claims
• Whether you smoke: You pay less if you don’t smoke
• Your occupation: You’ll pay more if you work in a job with a high risk of injuries
• The definition of disability: The broader the definition of disability, the higher the premium. A policy that covers you if you can’t work in your own occupation but could earn income in a lower-paying job will cost more than a policy that covers you only if you can’t work at all.
• Length of waiting period: This is known as the elimination period. You can reduce the premium by increasing the waiting period before benefits kick in.
• Your income: The more income you have to protect, the more you’ll pay for coverage
• Length of benefits: The longer the period that the policy promises to pay out if you become disabled, the more you’ll pay in premiums
• Extra features: Additional features, such as cost-of-living adjustments to protect against inflation, will increase the premium

The following programs also offer financial help in case of a disability, but they have limitations.

• Social Security pays disability benefits, but it’s difficult and time-consuming to qualify, and the payments are low. The average monthly disability benefit in 2017 was $1,172.
• State disability programs are offered in California, Hawaii, New Jersey, New York and Rhode Island. They provide short-term disability coverage, in most cases for up to six months, according to Life Happens, an insurance industry trade group.
• Workers' compensation insurance replaces a portion of income if you’re disabled because of a work-related injury. All states require employers to have workers compensation coverage for their employees. Most long-term disabilities, however, are not the result of work-related injuries.

Although these programs can help, they don’t fully cover the risks of losing the ability to work after an illness or injury. Disability insurance is the smart bet to provide a safety net for your future.

When you’re thinking about buying long-term disability insurance, ask yourself these questions, Hoffman suggests.

1. How much of your income would you need to replace to maintain your lifestyle if you became disabled and couldn't work?

Use the answer to determine the monthly benefit to select.

2. How long could you wait before the disability benefits kicked in?

This will determine the "elimination period" — the number of months you would wait after becoming disabled for the policy to pay out. A typical elimination period is 90 days, but you can choose shorter or longer periods. The longer the elimination period, the lower the insurance price.

3. How long would you want the benefits to last?

For some occupations, such as plumbers and carpenters, benefits are limited to five years on most policies, Hoffman says. For desk jobs, you can choose a benefit period to last a certain number of years or up to a certain age, such as 65. The longer the benefit period, the higher the price of the policy.

4. How broadly would you define "disability"?

Highly skilled people who have invested a lot of money in training may want a policy that pays out if they can't work in their specialty. A neurosurgeon who loses the ability to operate might still be able to teach or work as a general practitioner, for instance, but those positions would pay far less than a career as a surgeon. Another consideration: Do you want a policy that pays out a portion of the benefits if you are partially disabled, meaning you can work only part time? Hoffman recommends this option because people who suffer a disability often need to cut back on their hours, either on the front end as their condition deteriorates from an illness or on the back end as they recover from an injury or illness.

Tinker with the benefits if the price quote is too high. Hoffman recommends:

• Start by increasing the waiting period before benefits kick in
• Reduce the payout period
• As a last resort, reduce the monthly benefit amount