What is disability insurance and who should have it?

Do you have a financial plan in case you become disabled and unable to work due to illness or injury? According to the Social Security Administration (SSA), nearly one in four Americans who turn 20 in 2024 will experience a disability that affects their ability to work before reaching the age of 67.

Disability insurance can replace lost income if you are unable to work due to a non-work-related health issue. Despite this, only approximately half of U.S. workers had disability insurance in 2023, according to Guardian® Insurance.

Disability insurance is an important topic to understand, including the various types available and how to determine if it's suitable for your needs.

Short-term disability insurance

Paid medical leave, also known as short-term disability insurance, provides income replacement for individuals who are unable to work due to a temporary health issue. The duration of this coverage typically ranges from three months to a year, as stated by ADP, a human resources and payroll company.

Payouts are often given due to accidents, injuries, illnesses, pregnancy, and maternity leave.

Typically, short-term disability replaces between 50% and 80% of your wages until you return to work or hit a predetermined limit. This coverage is often provided by your employer, although the terms and limits vary. In California, Hawaii, New Jersey, New York, and Rhode Island, companies are required to provide this coverage.

Employers may cover all or part of your premium, or you may have to pay it yourself. Some employers offer additional coverage that you can purchase.

Guardian is a top-rated insurer with excellent customer service, and it has received fewer complaints compared to other insurers. It offers a range of flexible short-term disability policies that allow you to increase coverage if your salary increases or stop paying premiums if you lose your job. Additionally, Guardian provides a residual disability benefit that enables you to file a claim if your income or hours are reduced due to a health issue, rather than paused.

Long-term disability insurance

The National Association of Insurance and Financial Advisors (NAIFA) states that long-term disability replaces between 40% and 70% of your income for as little as 24 months or as long as the remainder of your working years, providing financial security in the event of a serious illness or injury.

The Patient Advocate Foundation states that most plans have a waiting period of three to six months before benefits kick in, though it can be as long as a year. If you've paired it with short-term coverage, your long-term benefits will usually kick in when your short-term disability runs out.

An employer or private insurer can issue a long-term policy, but employer-backed policies expire upon leaving the company, while individual plans are portable. The cost of an individual long-term disability policy typically ranges from 1% to 3% of your salary, as per NAIFA.

The Standard®, one of the country's largest providers of long-term disability, offers policies that can supplement your income until age 67. These policies come with an automatic 4% benefit increase annually for the first five years, and policyholders can add more coverage without needing a medical exam.

You can receive benefits while working in a different field and a catastrophic disability rider that pays out if you're severely disabled or unable to carry out the activities of daily living.

Supplemental disability insurance

An employer-sponsored short- or long-term policy may have gaps in coverage, which can be filled by supplemental disability insurance. This type of insurance offers higher payouts, longer coverage periods, and tax-free benefits. Unlike a workplace policy, supplemental coverage can be taken with you when you change jobs.

Mutual of Omaha's Mutual Income Solutions offers exceptional coverage in the space, providing short- and long-term options that pay out $300 to $20,000 per month in $100 increments, depending on the policy. Additionally, there is an automatic no-cost increase that increases your available payout by 4% each year.

Who needs disability insurance?

Anyone who relies on a paycheck can benefit from disability insurance, particularly if they have dependents such as a spouse, children, elderly parents, or others who rely on their income for support.

Despite providing financial support for those disabled or ill, Social Security's eligibility criteria are more stringent and the benefits are less comprehensive: In December 2023, the average monthly Social Security Disability Income payment was only $1,395.

It is advisable to apply for disability insurance prior to needing it, to avoid the stress of rejection or high premiums.

Can I get disability insurance through work?

While most employers offer short-term disability coverage, only about half of large and mid-sized companies provide long-term disability insurance, according to the Insurance Information Institute.

Group disability plans are less flexible, have shorter coverage periods, and are more restrictive in defining a disability. If your company pays the premiums, you'll be subject to state and federal income taxes on any payouts, as per the IRS.

Consider purchasing a standalone disability insurance policy if your employer's disability benefit does not meet your financial needs, income, debts, and goals.

Find the best disability insurance

Bottom line

If you're unable to work due to illness, injury, or disability, disability insurance could be a crucial lifeline for you and your dependents. Check with your employer if they offer a plan and if it provides sufficient coverage. If not, consider purchasing individual disability insurance.

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