If you work or live in America, it is essential to understand your options if you become disabled. Approximately 25% of workers become disabled before reaching retirement age, leading to the inability to work and earn an income independently.
Disability insurance works by providing a valuable safety net that can help replace lost income while you recover. Explore the types of disability insurance coverage and learn more about how these policies work.
What Types of Disability Insurance Are Available?
The most common types of disability insurance are short-term and long-term disability policies. Private insurance companies provide these policies and may also be offered through your employer.
In addition to disability insurance policies from private insurance companies, you may be eligible for Social Security disability insurance in certain situations. The Social Security Administration provides this type of insurance.
What Does Short-Term Disability Insurance Provide?
Short-term disability income insurance is designed to provide coverage in cases where you must recuperate for several months before returning to work. Although coverage lengths vary by provider, most plans offer payments for three to six months, and some may cover you for an extended period.
For example, with some short-term individual disability insurance, you can receive benefits for up to two years. With short-term disability income insurance, you can expect to receive payments that replace 60% to 75% of your income while you’re unable to work. Some states, including California, Hawaii, and New York, require employees to have short-term disability insurance.
What Are Short-Term Disabilities?
Although covered short-term disabilities vary from policy to policy, short-term disabilities typically include:
- Pregnancy and pregnancy complications
- Injuries that happened outside of work
- Conditions that affect your back or joints
- Recovery after surgery
- Short-term illnesses
Many policies exclude mental illnesses and self-inflicted injuries.
How Do I Qualify for Short-Term Disability Insurance Benefits?
To receive short-term disability benefits, you’ll need to purchase disability insurance while you’re healthy. If you have cancer, arthritis, multiple sclerosis, or other pre-existing conditions before buying a policy, your insurance company may limit your benefits and deny your coverage.
Similarly, if you’d like to receive short-term disability benefits while recovering from giving birth, you’ll need to purchase a policy before becoming pregnant. If you try to purchase disability insurance after giving birth, you may be denied coverage.
What is the Claims Process for Short-Term Disability Insurance?
If you’d like to make a claim to receive short-term disability benefits, you’ll need to have your condition diagnosed by a healthcare provider. You must provide medical records with your claim application.
Once your insurance provider approves your claim, your monthly benefit payments will usually start right away. Some policies may require you to wait at least one week before getting your first payment.
What is Long-Term Disability Insurance?
A long-term disability insurance plan supports you when you experience a life-altering disability that keeps you out of work for a number of years or the rest of your lifetime. Usually, you can begin receiving long-term disability insurance benefits around six months after having your illness or injury diagnosed.
Most long-term disability policies require a waiting period, and you’ll need to use all of the benefits provided by your short-term disability policy first. After you exhaust those benefits, your long-term disability policy benefits begin.
When you purchase your long-term disability insurance policy, you’ll be asked to select the waiting period that fits your needs. Your waiting period is sometimes called an elimination period. The benefits and monthly payments you receive will be of similar monetary value to those provided by short-term plans, but they will continue for a longer period.
What Are Long-Term Disabilities?
As with short-term insurance, the conditions that long-term disability insurance covers vary. Depending on the policy you have, long-term qualifying disabilities could include:
- Crohn’s disease
- Multiple sclerosis
- Bipolar disorder
- Chronic fatigue syndrome
- Degenerative disc disease
How Do I Qualify for Long-Term Disability Insurance Benefits?
Eligibility for long-term disability insurance requires you to purchase a policy before you become ill or disabled. Long-term policies won’t cover disabilities that occur before the date of your application. You may be able to purchase long-term disability insurance at subsidized rates from your employer. If that’s not an option, consider purchasing an individual policy on your own.
How Do I Make a Claim for Long-Term Disability Insurance?
To claim long-term disability insurance, you must undergo a medical exam and submit medical records to qualify. Due to the longer length of coverage with this type of disability insurance, you may need to provide more extensive medical documentation with your claim. For example, you might be asked for copies of lab test results, x-rays, or imaging studies.
What Happens After My Initial Claim?
After your initial claim, your insurance company may ask for regular medical updates about your disability. They’ll use this information to determine if you still qualify as disabled under their policy definitions.
If your health improves and you’re cleared to resume work, your disability insurance payments may stop. However, if the impact of your disability prevents you from returning to work in your full capacity, you may be eligible to receive partial payments from your insurance policy. Generally, you’ll need to have a specific rider on your policy to get partial payments.
What Can I Do With Short and Long-Term Disability Insurance Payments?
You can use your disability insurance payments to cover your expenses when you’re unwell. For example, you could use your payments to cover:
- Student, auto, or personal loans
- Utility bills
- Rent and mortgage payments
- College tuition costs
- Childcare expenses
- Grocery and restaurant bills
- Contributions to retirement savings accounts
Do I Need to Pay Taxes on My Disability Insurance Payments?
Generally, if your employer pays your disability insurance premiums, you’ll need to pay taxes on any disability insurance payouts you receive. Employers get tax breaks when they pay premiums and may deduct their payments as business expenses.
If you pay your premiums, you may owe taxes on your benefits if you choose to make a pre-tax payroll election. If you choose to make a post-tax payroll election, you won’t need to pay any taxes on the disability income.
What Factors Should I Consider When Shopping for Disability Insurance?
When you’re considering your options for disability insurance, start by assessing your risk. Certain professions, including nursing, electrical work, and roofing, carry a higher risk of injury than other jobs. Consider getting a policy with robust coverage if you work in one of these fields.
As you assess your risk, you’ll need to think about your personal and family health history, your current health and health insurance, and any health risks you could face in the future. Disability insurance policies often require medical underwriting, and you could be asked questions about your personal and family health history on your application.
Some companies offering disability insurance deny coverage to anyone with a personal or family history of cancer. You may need to have blood tests and a physical exam as part of the underwriting process.
Before you apply, check with several different insurance companies to ask about the medical requirements for the applications. If you are approved for a policy but worry about future health risks, it may be worthwhile to take out a policy that has better benefits, even if it requires higher monthly premiums.
Next, consider your net income when shopping for disability insurance policies. Insurance companies use your net income to determine the amount of coverage that you’re eligible to receive and how much your monthly payouts will be.
If you’re a freelancer whose income varies from month to month, the insurance company may ask you for copies of the last three years of your tax returns. After adding up your total income over three years, the insurer will divide the figure by 36 to calculate your average monthly income. This figure is a factor in your disability insurance cost and the cost of your monthly premiums.
Finally, you’ll want to consider group coverage from your employer in addition to private policies. Usually, group policies don’t require medical underwriting, so they may be a good fit for you if you have pre-existing health conditions.
How Long Should I Keep My Policy?
If you’re 65 or above and still working, most insurance experts advise that you drop your disability insurance. If you become disabled at this age, you are considered retired, and your disability insurance policy won’t pay any benefits.
Where Can I Find Out More About Disability Insurance?
Visit Finance is us to explore all of your disability insurance options. We can help you sort through the different policies available to you and provide guidance on the benefits and exclusions for the policies you’re considering. We help you make informed choices about the short and long-term disability insurance options available for your unique health needs.
Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.