Disability Insurance: Meaning, How it Works, and Types of Disability Insurance

By Writer Last updated Feb 15, 2022

The aim of insurance is to reduce financial uncertainty and make accidental loss manageable. Disability insurance protects you from the risk of losing your income due to injury, medical condition, or illness that meets the definition of disability.

The disability income otherwise called DI or disability income insurance protects your ability to work and earn money. Which is used to pay for other essential types of insurance such as health insurance, which protects your well-being. Motor insurance provides coverage for vehicles against damage and accidents, home insurance protects where you live.

However, in this article, we provide information in detail on everything you need to know about disability insurance, its importance, how it works, and other necessary additional information.

Meaning of Disability Insurance

Disability insurance often called disability insurance income or income protection is a type of insurance that pays benefits to a policyholder as a partial replacement of income lost due to illness or injury. However, it can help you cover your essential living expenses when you are unable to work due to an injury or sickness.

However, disability insurance provides coverage that helps you pay bills like tuition, car payments, and food, clothing, and utility expenses. It’s income protection that pays you a part of your monthly income if you are unable to work due to an illness or injury.

Moreover, disability insurance is available through both public and private programs. It is a substituting payment of a small fee known as an insurance premium, to a professional insurer in exchange for the assumption of the risk of illness or injury and a promise to pay in such an event.

How Disability Insurance Works

However, just like we said earlier, it is an agreement made between a policyholder and an insurance company. The insurer agrees to pay you a monthly benefit amount when you suffer an illness or disability that affects your ability to work. Which is in exchange for the monthly payments you make known as insurance premiums.

Disability insurance is income protection designed to help policyholders meet their financial obligations such as paying bills, household, and other expenses. However, if you have this insurance policy and become unable to work due to an illness or injury, you can start receiving payment benefits by filing a claim to the insurance agency that insures your income while on leave from your work.

Disability Insurance Policy

An insurance policy is a document detailing the terms and conditions of an insurance contract. It typically states what is covered in the insurance, what isn’t, and other details of the contract. However, a disability insurance policy will lay out the following:

The amount you pay in premium, which is the payment you make in exchange for your coverage.
How much do you receive as your benefits payments? It normally pays 60 to 80 percent of your income.
How it defines your disability level if it’s a partial disability or otherwise. Which typically determines the percentage and duration of benefits payments.
The duration or how long your benefits will last.

Types of Disability Insurance

Moreover, there are several types of disability insurance. However, let’s dive into explaining each specific type:

Short-Term Disability Insurance:

This type of income protection provides payment benefits when suffering a temporary injury or illness. Moreover, short-term disability insurance is usually provided by employer group plans. It typically covers 40-60 percent of the income you made before you became disabled.

Also, the benefits payments usually last three to six months. Although some policies may pay as long as two years, it almost never lasts more than a year. The short-term has a waiting period of 0 to 14 days from when disability occurs before benefits can start.

Although this type of policy is available on the open insurance market, financial experts often advise against it. This is because payment benefits usually do last more than a year. Therefore, your premiums may end up costing more than the payment benefits. Pregnancy, childbirth, musculoskeletal disorders, etc. are some of the common conditions people file for short-term coverage.

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Long-Term:

Long-term disability insurance helps people that suffer a long-term illness or injury that prevent them from working for several months or years to maintain their financial independence. The long-term plans provide benefits until you have completely recovered from the disability. The length of coverage usually depends on your plan.

However, the long-term can be purchased on an individual basis or through a group plan. However, it is more expensive than the short-term, but it is better than the latter because of its much higher benefits and duration.

Furthermore, the long-term policy replaces 60 to 80 percent of the income you earned before becoming disabled. Mental health problems, cancer, pregnancy, serious musculoskeletal damages, etc. are conditions that usually result in filing for a long-term disability insurance claim.

Individual:

The individual is the type of disability insurance that you purchase for yourself through a financial representative. it is usually purchased by individuals that earn a higher salary or depend on commissions. The individual disability insurance plan provides additional income protection to cover your financial expenses if you suffer an injury or illness that prevents you from working.

State Security:

The State Security Disability Insurance also called the SSDI, is a government program administered by the Social Security Administration. Moreover, it provides benefits that cover your income while you are on leave from work due to injuries or illness that prevents you from working, just like the other insurance types. But the benefits are much lower than with an insurance plan you purchase individually to get through work.

However, it is difficult to meet the eligibility requirements of SSDI. Some of them include:

You must have worked recently and long enough under the Social Security
You must meet a specific income requirement
Must have worked in jobs covered by Social Security
Your health condition must meet their definition of disability

State:

The state disability insurance is for individuals who live and work in the following states: California, Hawaii, New Jersey, New York, and Rhodes Island. These five states require employers to offer insurance coverage to their employees. However, just like the SSDI the state disability insurance has coverage and benefits limitations that are specific to each of the five states.

Additional Notes

However, to determine the cost of your policy and whether they will offer you a policy, the insurance company through a process known as underwriting reviews all your medical records and other information to assess your risk of becoming disabled. Some of the factors that insurance companies look at when assessing risk include your age, gender, occupation, annual income, health records, location, etc.

Also, note that long-term disability is different from long-term care insurance. However, the latter provides coverage for the cost of nursing care and healthcare services. Which is if you are unable to perform daily living activities such as bathing, eating, walking, etc.