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What is disability insurance?

In one survey, over 70% of employees said they’d experience financial hardship if their paycheck were delayed for one week. But what if you couldn’t work for months, or even years?

In a 2018 survey from the American Payroll Association, over 70% of employees said they would experience financial hardship if their paycheck were delayed for even one week. But what if you couldn’t work for months, or even years?

Disability income insurance is a type of policy that provides a safety net if you’re sick or injured and can’t work. You can think of it like income protection insurance – if you have a medical condition that prevents you from drawing a paycheck, disability insurance replaces a portion of your monthly income to help cover key expenses while you heal. The amount of income replacement varies by policy, but is usually between 40-70% of your salary.

In this article:

What does disability insurance cover?

Exactly which conditions are covered or excluded will vary depending on the carrier, policy type, and options you choose, but disability income insurance generally covers illnesses and injuries that prevent you from working normally. (If you’re curious, yes, contagious diseases such as COVID-19 are typically covered by disability policies.)

In conversations we’ve had, many people seem to associate disability insurance with accidental injuries. While injury protection is certainly a major benefit of disability insurance, accidents are actually a relatively small portion of total claims. According to the Council for Disability Awareness, pregnancy, illnesses such as cancer, and musculoskeletal conditions like arthritis are actually far more common reasons for disability claims.

Who needs disability insurance?

So why is disability insurance important? Many people seem to be acutely aware of the need for life insurance – especially following major life events like having a child or purchasing a new home. But for some reason, comparatively few seek out disability insurance if it’s not provided through their employers. That could be a mistake.

You’re far more likely to become disabled than to die prematurely. According to the Social Security Administration, more than 25% of today’s 20-year-olds will become disabled at some point before reaching their normal retirement age, while around 6% will die before retiring without becoming disabled.

While there’s an obvious silver lining there – we’d also very much prefer not dying –  it also means you might want to bump disability coverage up your list of priorities. Most people are likely to benefit from coverage, but there are some situations that make disability insurance especially important. Those include if….

Disability insurance is more affordable than you might think

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What qualifies as a disability?

It depends on the disability insurance policy and options you choose, so there isn’t a blanket answer for what qualifies as a disability. Using Haven Disability as an example, a total disability occurs when…

Your occupation is defined as “your regular profession(s) or business(es) at the start of a disability for which you receive or can receive remuneration.”

Types of disability insurance

Disability income insurance is divided into two main types: short term and long term. While they both cover illnesses and injuries that prevent you from working, they differ in two major ways: the benefit period and the elimination period.

Benefit period

A disability policy’s benefit period is the maximum amount of time you’ll receive benefits for each approved disability claim if you can’t work because of an illness or injury.

Elimination period

The elimination period determines how quickly you’ll qualify for benefits after becoming disabled. To give an example, an elimination period of 14 days means you’d be eligible for disability benefits if an illness or injury causes you to miss two weeks of work. If your policy has a 60 day elimination period, you’d have to miss work for two months before becoming eligible.

Short term disability insurance

Just like it sounds, short term disability insurance is designed to cover short term needs if you have an injury or illness that prevents you from doing your job. The length of the benefit period will vary depending on the temporary disability policy, but is typically between three months and one year, and replaces 60-70% of your base salary.

Because short term disability is meant to provide more immediate protection, it comes with relatively short elimination periods as well. Some policies, such as Haven Disability, can begin paying after just 14 days of disability, but elimination periods of 30 days are also fairly common.

Long term disability insurance

While short term policies can begin paying disability benefits in as little as two weeks, long term disability benefits usually don’t kick in until at least 90 days have passed, or sometimes longer. That’s because long term disability insurance is designed to cover illnesses and injuries that keep you out of work for years, or even decades. Most long term disability policies replace 40-60% of your base salary.

Because the benefit period can extend for years or more, long term disability insurance is more expensive than short term. That may help explain why fewer employers offer long term than short term disability in their benefits packages, according to the Bureau of Labor Statistics.

Which one is more important?

Ideally you won’t have to choose. Since long term disability picks up where short term leaves off, the two types of disability income insurance complement each other well. If having both isn’t an option, it’s really a matter of your personal situation, and how soon you’d need income protection if you were unable to work.

Social Security Disability Insurance vs. long term disability insurance

Social Security Disability Insurance (SSDI) is a federal disability insurance program that provides similar benefits to long term disability insurance. It’s an valuable asset to many Americans who are unable to work, but it’s not a perfect substitute for private disability insurance.

To receive SSDI benefits, you must have worked long enough, and recently enough, to have enough Social Security work credits to qualify. If you’re unsure, you can learn more about the requirements here. Your medical condition also needs to be serious enough to last for at least one year or result in death.

If you meet the first two criteria, the Social Security Administration then evaluates your ability to do either the work you did previously or any other type of work, based on your age, education, experience, and skills. That raises the severity of the disability required to receive benefits.

Finally, if you do qualify for SSDI, the earliest you can receive benefits is after five months of disability. It’s usually easier to qualify for long term disability insurance benefits than SSDI, and it typically begins paying sooner than Social Security. For those who do qualify for SSDI, the average monthly disability benefit was $1,280, as of April 2021.

What about workers’ compensation?

Workers’ comp is a type of insurance that protects employees who suffer an on-the-job illness or injury. Like disability insurance, it replaces a portion of your paycheck, and also covers medical expenses and care or funeral costs.

Workers’ compensation is a great benefit, especially if you work in a dangerous occupation, but isn’t a replacement for disability insurance. Most disabilities are caused by illnesses and injuries that aren’t work-related. In fact, only 1% of workers missed time because of an occupational illness or injury in 2016, according to the Council for Disability Awareness.

Individual vs. employer-provided disability policies

Disability benefit packages provided by employers are a great perk. Since they’re group plans, they’re almost always less expensive than purchasing private disability insurance, and acceptance is usually guaranteed. Some employers even pay for the coverage entirely. (Like we said, it’s a nice perk.)

Unfortunately, most Americans don’t have employer-provided disability insurance. A report from the Bureau of Labor Statistics shows that as of 2014, just 39% of private sector employees took part in workplace short term disability insurance, and 33% had a long term policy. That leaves millions of Americans without disability protection.

One important thing to note is that If your employer pays for your disability insurance, or if you pay for it with pre-tax money, the disability benefits you receive will be subject to taxes. That means you may not have quite as much coverage as you think. On the other hand, if you pay for an individual disability insurance policy with after-tax money, your disability benefits won’t be taxed further.

Meet Haven Disability

Haven Disability can work much like a typical group short term disability insurance policy, with monthly benefits up to 60% of your income. Since the disability policy is purchased privately, the benefits aren’t subject to tax deductions, and the coverage is portable if you switch companies.

But Haven Disability is also highly configurable, with monthly benefit amounts from $500 to $5,000. If you’re trying to minimize your monthly disability insurance premiums and want to cover just one important expense, such as your rent, mortgage, or a car payment, Haven Disability lets you do that. You can also choose from benefit periods of 3, 6, or 12 months, and elimination periods of 14, 30, or 60 days. That lets you customize the coverage to fit your needs and budget.

Haven Disability can be applied for online in minutes, without phone calls or fluids. Learn more at disability.havenlife.com, or if you’d rather jump straight to the numbers, you can get a 30-second estimate at disability.havenlife.com/quote.

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About Jeff Hampton

Read more by Jeff Hampton

Our editorial policy

Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our editorial policy

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

Our disclosures

Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.

MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.

Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus.html

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