What is Disability Insurance?
Disability insurance (DI) is coverage designed to pay supplemental income while the insured lives with a serious disability. There are several different types of DI, and each functions differently.
Types of disability insurance
Four different types of disability insurance can step in to provide income replacement after a disability:
Employer-sponsored short-term disability insurance. Some employers carry short-term disability coverage for their workforce. A handful of states mandate this coverage. If you work for a company with this type of policy in place, you’ll get a percentage of your pay (e.g., 60%) distributed to you on a regular basis for a set period of time (usually, three months to one year) if an illness or injury leaves you unable to work.
Disability income insurance. This insurance product pays you a set sum of money on a specified timeline for as long as you meet the insurer’s disability requirements.
Social Security disability insurance (SSDI). The Social Security Administration offers disability insurance for people with significant disabilities. This coverage is free and if you’ve paid a sufficient amount into Social Security, you’ll likely be eligible. That said, meeting the disability requirements can be difficult, and SSDI often comes with a six-month waiting period or longer before you’ll start receiving payments.
Workers’ compensation. While you won’t buy this coverage for yourself, your employer should have it for you. That said, this only applies if you get injured on the job and workers’ comp claims are notoriously tricky to get approved.
Understanding disability income insurance
You don’t have a lot of control over two of the three types of DI. Your employer dictates your short-term coverage, and you can only get SSDI if you paid enough into Social Security and meet their notoriously strict disability parameters.
Disability income insurance is different. This is fully in your hands. And if you’re concerned that a disability could prevent you from being able to provide for yourself or your loved ones, this is an excellent way to put a safeguard in place.
You have two options for getting disability income insurance. First, you can buy it as a standalone insurance product. Secondly, and potentially more easily and affordably, you can add it as a rider to your life insurance policy.
Disability income insurance riders let you tap into your life insurance policy’s death benefit while you’re still living, provided you meet your life insurance provider’s parameters for what’s called a “total disability.” Usually, if you’re unable to work, you’ll qualify.
Then, with most policies, you’ll get a percentage of your death benefit distributed to you as cash on a regular basis for as long as you live with the disability, or up to a cap set by your policy terms. Be advised, though, that this money gets subtracted from your death benefit, which means your beneficiaries are left with less when you pass away.
Still, though, because a disability income rider can prevent financial burdens while you’re living, it alleviates strain for you and your family in what could otherwise be a very challenging time. And many beneficiaries would rather be able to use that money when they need it — while you have the disability — rather than having to wait until you’re gone to pay off debts that accrued while you were unable to work.
It should be noted that standalone disability policies do usually offer a much broader definition of disability than add-on riders to life insurance policies.