What is Disability Insurance & How Does it Work?

If you’re unable to work due to an accident, illness or other condition, you need time to recover and heal. Your bills, unfortunately, are unlikely to take a break.

Disability insurance can help support your finances while you take care of yourself.

It’s supplemental insurance that can help protect a portion of your income if you can’t work due to a qualifying illness or injury – such as back pain, depression or the birth of a child.

Qualifying disabilities, limitations and exclusions vary for different policies and providers. Carefully review your policy options to determine your coverage.

Short-term vs. long-term disability

There are two types of disability insurance plans: short-term disability (STD) and long-term disability (LTD). Short-term disability insurance can cover situations in which an employee is temporarily unable to work but may ultimately return to work.¹

Long-term disability insurance can financially help employees who may be unable to work for an extended period of time or even permanently.¹

Compensation under these plans differs by plan and carrier. Short-term disability typically provides a higher percentage of an employee’s pay for a shorter period of time (from a few days to a few months).¹ Long-term disability, on the other hand, can pay a lower percentage but provides payouts for a longer period of time.¹

How do disability benefits work?

Depending on your policy, if you qualify for disability benefits, you’ll typically receive weekly benefits for STD and monthly benefits for LTD sent directly to you.² Typically, you can use the money however you see fit, including to help cover medical expenses, such as copays and deductibles, or non-medical expenses, such as groceries and household bills.² Essentially, it’s your money to spend as you like — just like your normal income.

Disability insurance in action

Here’s an example of how disability insurance could work: Let’s say you dislocate your shoulder playing pickleball with your friends over the weekend. You assume you’ll be back to work on Monday, but a visit to the hospital tells a different story.

You learn that the shoulder injury needs surgical correction and a recovery period of three months. This will keep you from being able to perform your job as required and temporarily puts you out of work.

Fortunately, you have short-term disability insurance as part of your benefits plan and this particular injury is covered by the plan. You file a claim with your insurance provider and your claim is approved. You then receive financial support to help cover your living and other expenses while you’re unable to work.

Disability insurance vs. workers’ compensation

Depending on your plan, disability insurance can help cover injuries or illnesses that are related to work. Workers’ compensation provides benefits to employees who are injured on the job or have a work-related illness.² Disability insurance may go beyond on-the-job injuries, and pay a portion of your income for a medical condition, illness or another incident.

You may also benefit from other supplemental insurance policies — such as critical illness insurance, hospital indemnity insurance or accident insurance – to help protect your finances.

How much disability insurance do you need?

To determine the right amount of disability coverage for you, start by adding up your monthly household expenses. Include things like mortgage or rent payments, utilities, groceries and childcare. You may want to aim for coverage that extends beyond this number to help cover any medical bills you might receive as a result of a disability-qualifying injury or illness.

Some employers provide several options under their group plans. The right amount of coverage for you depends on your unique situation. However, a reasonable goal may be to aim for coverage that replaces 60% – 80% of your after-tax, monthly income. You can use our disability coverage calculator to help you see what kind of coverage you may need.

When does your disability insurance start?

Disability insurance benefits typically begin after an elimination period.¹ This is a length of time after a disability begins during which you must continue to be qualified as disabled before benefits can begin. If you have coverage through your employer’s group plan, they usually set the number of days for the elimination period.¹

With long-term disability benefits, for example, a 90-day elimination period means you would need to be considered disabled for 90 days after your disability begins before you can start receiving benefits. Short-term disability eliminaton periods can vary and start immediately or shortly after the date of disability.

Depending on your policy and provider, you may be able to choose between different elimination period options. Determine how long you may be able to sustain your household expenses without income to help you decide which elimination period may be right for you.

How to get disability insurance

To see what disability insurance options are available through your employer, review your employer’s benefits information or contact your human resources (HR) representative. You can typically enroll in some disability insurance plans during your annual open enrollment period or anytime you have a qualifying life event (QLE) if it’s a supplemental coverage option offered by your employer.

You can also purchase disability insurance policies on your own from private insurance companies or state programs, or you can apply for coverage through the Social Security Disability Insurance (SSDI) program.³

To qualify for SSDI, you’ll need to meet non-medical requirements, as well as have a medical condition that’s expected to last at least a year or result in death.⁴

If you received other types of aid, such as from a state-mandated disability or paid medical leave benefit, the payment you receive from your short-term disability insurance may be offset by it. So your payments from your policy may be less than the full amount.