What You Need to Know About Disability Insurance

by Emily Guy Birken · 12 comments

You have health insurance and life insurance, which means you and your family are entirely covered should something happen, right?


Suppose you suffer an injury or long-lasting illness that makes it impossible for you to work. While your health insurance coverage will take care of your medical expenses, and your life insurance will provide for your family should the worst happen, you will be facing debt and potential financial instability if you have no way of replacing your income while you are disabled. And according to the website DisabilityCanHappen.org, “just over [a quarter] of today’s 20 year-olds will become disabled before they retire.”

Disability insurance is one of those things that no one ever thinks they need. But you need to know that you could still pay your bills if you were to become temporarily or permanently disabled. Here are the basic facts you need to know about disability insurance:

1. Disability insurance will generally cover about 60% of your lost income. There are a few additional policies that you can purchase in order to increase the percentage of your earnings you can take home while disabled, but there are no policies that will replace 100%. This is because the insurance companies want you to go back to work as soon as you are able to. With a 100% replacement of lost income, what incentive would there be to go back to the grind?

2. If your disability insurance is offered through your employer, then you might not be as well covered as you may think. First, most disability insurance through employers is short-term disability, which means you will be covered up to five, or possibly even ten years. If your disability is a permanent one, you would need coverage up until your retirement age, meaning long-term disability. You can purchase long-term coverage on your own in order to supplement your employer’s coverage.

Secondly, if your employer is paying the premium for your disability insurance, then that means you will have to pay taxes on the benefits. Find out how much your insurance will cover, and then do some math to see if that percentage minus taxes will be enough for you to maintain your financial life. If not, you will want to get some supplemental insurance.

3. There is a difference between “any occupation” coverage and “own occupation” coverage. The first means that you are covered only if you cannot hold down a job of any kind, including burger-flipping, and being a Wal-Mart greeter. This means that holding any occupation coverage could leave you vulnerable to being denied benefits.

It’s also important to note that some policies will start as own occupation coverage, and then switch to any occupation after a period of time, commonly two years. This could give you time to search for and potentially train for another occupation, but it could also simply mean that you’re up a creek after two years of coverage.

4. Depending upon your occupation, it could be difficult to find a policy. The self-employed and those who work in somewhat risky jobs (such as construction work) will often have trouble finding an insurer. For those who are self-employed, like freelancers, consultants, and potentially even small business owners, insurance companies are uncomfortable underwriting their policies because income can be difficult to verify. Once you have been working for at least three years, and have income records for that time, it becomes easier to find an insurer willing to take you on.

5. The longer you can hold off before the benefits kick in, the less you’ll have to pay in premiums. Having an emergency fund is incredibly important, and here is yet another reason why you should aim to have the money to pay for at least six months worth of bills. Premiums on disability insurance go down if you can wait for those benefits for 90 or 180 days.

No one thinks that a medical emergency or major injury will happen to them. Unfortunately, we all need to plan for the worst and hope for the best—and having a good disability insurance policy in place is a great way to do that.

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  • Beau W says:

    When I first started working for my employer when it came time to sign up for medical insurance I asked about disability insurance and how much it cost. It cost me under $10.00 dollars a check for the insurance. It’s worth every damn penny to have that peace of mind. I’ve seen the other side of not having it.

  • Optinsure says:

    Why should one buy a disability insurance when there is Medicare offered at a cheaper premium?

  • VICTOR BLAHA says:



  • Dorothy says:

    What are good insurance companies to call regarding additional disability insurance?

  • Dorothy says:

    Life Ant…is this true? I will have to ask my HR person for a copy of the disability insurance we have which is 60%. What about social security? I want to start collecting at 66. Does my disability stop once I start collecting social security?

  • Life Ant says:

    I would advise people getting insurance from their employer this – Read your policy cover to cover from your employer, I don’t know anyone who does that. So expect to be surprised if you do. Insurers are very sneaky in inserting confusing language, interpret-able to their favor of course. And you are at their mercy. If their coverage is 50%, any other coverage you purchased in addition will be meaningless because it will be “offset” and considered over-payment which means you will have to cut a check and pay them back as over-payment. So don’t go out blindly thinking if you have more policies covering you, you are covered up to your normal salary or more. You maximum total benefits might be limited to the primary policy of 50%. Also, any other benefits that kick in automatically such as early retirement will also be “offset” and paid back to the primary as over-payment because it’d exceed the 50%. Social security payment will be treated the same. It’s hard to believe how the lobbying power in Washington can affect people’s lives so negatively to benefit the insurer rather than the beneficiary.

  • Financial Advice for Young Professionals says:

    Not a huge fan of insurance in general. I only get mandatory insurance like car, home, etc. What are the odds of these things happening to you? I guess it’s personal preference as to what you want to be prepared for.

    Along those lines, I have an HSA thru my work and it has worked out great! I have about 8k tucked away invested in TIPS returning a nice profit for me…

  • Patty says:

    I have long term disability through employer and opted for short term as well. Two years later I ended up requiring surgery on my colon. I was out of work for three months. The short term disability kicked and boy was I grateful. Check your employee benefits and make sure that you have short term, long term disability insurance, you never know what will happen in the future.

  • Marbella says:

    There is no insurance that covers you and your family to 100%, if you find one it will cost you a fortune every month. But the main thing is that you read carefully the conditions in terms of insurance before you sign it, and not after.

    • M Meagher says:

      I don’t remember us reading the fine print, but our premiums were $675 each quarter for $3000 a month coverage if disability. Yes it may not have been 100% of what we needed but this goes a long way to keep our household stable. I have had no problems with the insurance company, they assigned an agent to our case and so far we are very glad to have chosen a reputable company so many years ago. There were so many times that it seemed like we were wasting our money on premiums but then the unthinkable happened. My husband just got unlucky in health, but we were lucky to have planned for loss of income.

  • M Meagher says:

    My husband bought a disability insurance policy in 1984, the premiums were steep but in 1999 at age 47 he suffered a stroke. We were glad to have the stability of income to help pay our bills when he couldn’t work.

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