What Is Disability Insurance and Is It Worth Buying?

When you're young, it's easy to assume you’ll always have good health. However, it’s only when you get sick that you realize you're not invincible. If you're lucky, you will only ever have minor illnesses that take just a couple of days to resolve themselves. Considering this uncertainty, it becomes crucial to think about disability insurance to safeguard your financial well-being in case of unexpected health challenges.

But many Americans become disabled for long periods of time and are unable to work. And when you can’t work but still have to pay the bills, how will you survive? 

By having disability insurance.

Research from the Social Security Administration found that about 27% of 20-year-olds will become disabled for a year or more at least once before retirement age. 

If those odds alarm you, here's what you should know about disability insurance and how it works.

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  • Disability insurance can be a lifesaver if you need coverage.
  • Private or employer-sponsored disability insurance may pay out faster than Social Security disability coverage.
  • Many Americans don’t realize the likelihood of becoming disabled at some point.
  • It’s important to compare different disability policies to find the right fit, based on benefit period, monthly premiums and own occupation vs. any occupation coverage.
  • Disability insurance is often offered through your employer at a discount.

What is disability insurance?

Disability insurance is an optional insurance policy that can provide a monthly payout if you cannot work. If you sustain a disability, you can file a claim and, if approved, start receiving monthly benefits to help with your expenses.

The Social Security program also has a disability program where you can file a claim to potentially receive monthly benefits. However, Social Security disability insurance benefits can take between three and five months on average to pay out, which means you’ll have to cover your living costs in the meantime. 

And the vast majority of applicants are rejected, at least initially. In fact, some people are never approved, especially if they are still technically able to work in some capacity.

Disability insurance premiums depend on your age, line of work and type of policy. For example, if you work on an oil rig, your premiums will likely be more expensive than if you're a marketing executive.

How disability insurance works

Most types of disability insurance have a waiting period, which is the period of time between becoming disabled and being eligible for disability benefits. The waiting period can range from 30 to 180 days, depending on your insurance policy.

In general, the cost of your policy will partly depend on the waiting period. The longer the waiting period, the lower your monthly premium. Most consumers choose a 90-day waiting period because that’s the maximum amount of time they can afford to live without a regular paycheck.

Disability benefits are only a certain percentage of your monthly income, often up to a 70% maximum. When you buy a policy, you may have to show proof of income so the insurance company knows what you earn. 

What disability insurance plans cover

Disability insurance coverage varies depending on the type of policy you have. However, it will include illnesses or diseases that affect your ability to work, such as:

  • Cancer
  • Pregnancy complications
  • Severe depression or anxiety
  • Becoming deaf or blind
  • Diabetes
  • Back pain

Your policy will usually have an elimination period, which is the time between incurring the disability and your first benefit payment. The duration of the elimination period will affect your monthly premium. The shorter the elimination period, the higher the monthly premium.  

Injured man filing an insurance claim form. Guides to understanding disability insurance.

What disability insurance doesn’t cover

Most of the time, disability insurance will not cover a pre-existing condition. However, some policies may cover those conditions after a certain number of years without a claim.

This is another reason why you should get disability coverage as soon as possible, before you’re diagnosed with a major illness that would not be covered as a pre-existing condition under your policy. 

Types of disability insurance

Short-term 

A short-term disability insurance policy will cover you for a maximum length of time, usually between three and six months. The elimination period on short-term disability coverage is usually between seven and 30 days.

Long-term 

A long-term disability insurance policy is the most common option that people choose. Long-term disability policies usually pay out for between two and five years, but some can remain in effect until you turn 65. 

The longer the payout period lasts, the higher the monthly premium. 

Own occupation vs. any occupation

When you purchase disability coverage, make sure to note whether the payments will begin if you cannot work at your current job or at any job. If your policy only becomes effective when you cannot work at any job, insurance professionals refer to it as “any occupation” disability coverage.

Any occupation insurance is often less expensive than “own occupation” disability insurance, which covers you if you can no longer work in your chosen profession.

How much does disability insurance cost?

The average premium amount is usually between 1% and 3% of your annual salary. For example, if you earn $75,000 a year, you should expect to pay between $750 and $2,250 in total annual premiums. That ranges between $62.50 and $187.50 a month.

Who should buy disability insurance?

Disability insurance may be a necessity for most people, unless they're self-insured. To determine if you're self-insured, figure out how many months of living expenses you could cover if you were unable to work. If you could only cover a few months of expenses, then you are not self-insured. However, if you could cover decades of being out of work, then you are self-insured.

How to compare disability insurance policies 

First, you should determine if the policy under consideration is for any occupation or own occupation. That will be the single biggest driver of the monthly cost or premium.

Next, figure out how long the coverage will last. Most policies pay out a benefit period between two and five years. However, some will pay out until age 65 if you cannot work. In general, the longer the benefit period, the higher the monthly premium. 

The average person who becomes disabled will remain disabled for 2.5 years. If you work in a manual labor job with a high risk of injury, then the average disability time may be longer for your field. 

FAQs

Is disability insurance worth it?

While investing in financial protection can be costly and its utilization may never arise, it provides crucial security that can be a lifesaver in times of need. Without this coverage, whether through employment benefits or a private plan, and in the event of incapacity to work, the absence of such a safety net might lead to regrets. Additionally, if unexpected challenges arise, substantial medical expenses may accrue, posing an even greater challenge when unemployed.

Consider financial protection akin to car insurance: Even if you never experience an accident, you don't view insurance as wasteful. The distinction lies in the fact that this coverage is optional and less prevalent, yet it serves a similar purpose in safeguarding against unforeseen circumstances.

Can I deduct disability insurance on my taxes?

Similar to life insurance, premiums for this coverage are not tax deductible. This holds true whether you work as a self-employed individual or in a traditional employment setting, or whether you personally finance private coverage or obtain an additional policy through your workplace.

What can I use disability insurance to pay for?

There is no limit on how you can use the payout from this coverage. Most people use the funds to cover their mortgage, auto loan, credit card bills, and more.

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I'm an award-winning lawyer and personal finance expert featured in Inc. Magazine, CNBC, the Today Show, Business Insider and more. My mission is to make personal finance accessible for everyone. As the largest financial influencer in the world, I'm connected to a community of over 20 million followers across TikTok, Instagram, YouTube, Facebook and Twitter. I'm also the host of the podcast Erika Taught Me. You might recognize me from my viral tagline, "I read the fine print so you don't have to!"

I'm a graduate of Georgetown Law, where I founded the Georgetown Law Entrepreneurship Club, and the University of Notre Dame. I discovered my passion for personal finance after realizing I was drowning in over $200,000 of student debt and needed to take action-ultimately paying off my student loans in under 2 years. I then spent years as a corporate lawyer representing Fortune 500 companies, but I quit because I realized I wanted to have an impact; I wanted to help real people and teach them that you can create a financial future for yourself.

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Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.