Your ability to earn income is likely your greatest financial asset. Disability insurance protects that asset by replacing income if illness or injury prevents you from working.

Why Disability Insurance Matters

Sobering statistics:

  • 1 in 4 workers will experience a disability before retirement
  • Average long-term disability lasts nearly 3 years
  • Most disabilities are from illness, not accidents
  • Social Security disability is hard to qualify for and often insufficient

Short-Term Disability Insurance

What It Covers

  • Temporary disabilities lasting weeks to months
  • Recovery from surgery or illness
  • Pregnancy and childbirth
  • Injuries requiring short recovery

Typical Features

  • Benefit period: 3-6 months
  • Waiting period: 0-14 days
  • Benefit amount: 60-70% of salary
  • Cost: 1-3% of annual salary

Sources

  • Employer-provided (most common)
  • State programs (CA, NY, NJ, RI, HI)
  • Individual policies

Long-Term Disability Insurance

What It Covers

  • Extended disabilities lasting months to years
  • Chronic conditions preventing work
  • Serious injuries or illnesses
  • Potentially until retirement age

Typical Features

  • Benefit period: 2 years, 5 years, or to age 65/67
  • Waiting period: 90-180 days
  • Benefit amount: 50-70% of salary
  • Cost: 1-3% of annual salary

Key Policy Terms to Understand

Definition of Disability

Own Occupation

  • Disabled if you can't do YOUR specific job
  • More comprehensive coverage
  • Higher premiums
  • Best protection

Any Occupation

  • Disabled only if you can't do ANY job
  • Less comprehensive
  • Lower premiums
  • Harder to qualify for benefits

Benefit Period

How long benefits are paid. Longer periods cost more but provide better protection.

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Elimination Period

Waiting period before benefits begin. Longer waits = lower premiums. Coordinate with emergency fund.

How Much Disability Coverage Do You Need?

Calculate Your Need

  • Target: 60-70% of gross income
  • Benefits may be tax-free if you pay premiums
  • Consider existing coverage (employer, Social Security)
  • Account for essential expenses

Coverage Limits

  • Insurers typically cap at 60-80% of income
  • Prevent over-insurance (incentive not to return to work)
  • May need multiple policies for high incomes

Employer vs. Individual Disability Insurance

Employer-Provided

Advantages:

  • Often free or subsidized
  • Easy enrollment
  • No medical exam usually

Disadvantages:

  • Benefits may be taxable
  • Coverage ends if you leave job
  • Employer controls policy
  • May not be "own occupation"

Individual Policy

Advantages:

  • Portable—you own it
  • Benefits tax-free (if you pay premiums)
  • More customization options
  • Better definitions often available

Disadvantages:

  • More expensive
  • Medical underwriting required
  • Must apply and qualify

Important Policy Riders

  • Cost of Living: Benefits increase with inflation
  • Future Increase: Buy more coverage later without medical exam
  • Residual Disability: Partial benefits if working part-time
  • Own Occupation: Best disability definition
  • Non-Cancelable: Insurer can't cancel or raise rates

Who Needs Individual Coverage?

  • Self-employed individuals
  • High earners (employer coverage may be capped)
  • Those in jobs requiring specific skills
  • Anyone without employer coverage
  • Those wanting guaranteed, portable protection

How to Buy Disability Insurance

  1. Review any employer coverage first
  2. Calculate income protection gap
  3. Work with insurance specialist
  4. Compare quotes and policy features
  5. Complete medical underwriting
  6. Review policy before signing