Personal Insights

Your Guide to Disability Insurance

Learn more about how disability income insurance works, what it covers, and how to find the right DI insurance coverage for your needs.

The loss of a paycheck can be devastating, particularly in a single income household. No one wants to think about getting sick or injured, but if you're financially unprepared, disability or long-term illness can quickly lead to financial hardship.

Many Americans underestimate their chances of experiencing an illness or injury that would prevent them from working. However, more than one in four of American workers will become disabled before reaching retirement age, according to the Social Security Administration and the Council for Disability Awareness. For those that work physically demanding jobs, the risk of injury or disability may be even higher.

Will Social Security Cover Disability?

Many people believe Social Security will cover their needs if they become ill and can’t work. However, Social Security disability benefits are based on how much you’ve paid into the system over time. As of 2021, the average monthly Social Security check is $1,543.

If you’re injured on the job, you may qualify for workers’ compensation benefits. However, the rules and availability of workers’ compensation benefits vary from state to state and typically only cover a percentage of your salary.

While Social Security and workers’ compensation benefits can help in the event of injury, they are often not an adequate replacement for earned wages. This is where disability insurance may be beneficial.

Disability income insurance can help you prepare for the worst without sacrificing your savings and investments. There are different types of plans available, and it’s important to understand your options and assess your personal needs before choosing a DI insurance policy.

Short-Term Disability vs. Long-Term Disability

There are two main types of disability income insurance available for purchase: short-term disability vs. long-term disability.

Short-term disability insurance replaces a portion of your income if you’re temporarily unable to work due to an injury, medical complication, debilitating illness, or even childbirth. Short-term disability benefits may kick in immediately, while some plans require a short waiting period — typically anywhere from one day to four weeks. Depending on your policy, your short-term disability benefits may last anywhere from six weeks to two years.

Long-term disability insurance picks up where short-term disability leaves off. This coverage insures your income against the risk of a chronic or life-threatening condition and can replace a portion of your income for several years or for the rest of your life, depending on the policy terms. A long-term disability policy can also be used to protect the income of high-paid professionals in specialized industries who are forced into an unexpected career change due to injury — for example, a surgeon with a hand injury that impacts their ability to perform surgery.

Finding the Right Disability Insurance Policy

Much like health insurance, disability insurance can be purchased individually or through an employer-sponsored plan. Before deciding which type of policy is right for you, it’s important to understand the benefits and drawbacks of each option.

Employer-sponsored disability insurance
Group disability insurance plans offered by an employer or through a professional association may be less expensive than a disability insurance plan purchased in the private market. The premiums can usually be conveniently deducted from your paycheck, and some plans can also be rolled over when you leave the company. Also, many employer-sponsored insurance plans don’t require you to prove insurability. “If you’re older or have a pre-existing health problem, that is an advantage,” says Jim Nonnengard, President, Regions Investment Services. “I usually tell clients to get the maximum level of coverage they can afford through their employer.”

Private insurance
If you're self-employed, if your income is based on commission or production, or if your employer doesn't offer disability insurance coverage, you may need individual insurance coverage. However, are other reasons to pursue individual coverage as well. Some may find that the coverage provided through their employer isn’t enough to cover their needs. If you’ve just purchased a home or have a growing family, for example, you may desire additional income protection.

Determining Your Coverage Needs

When evaluating your disability income insurance coverage, it’s important to review your policy carefully to understand how income and salary are defined, as the amount of your salary insured under a disability insurance policy will vary by plan. Your benefit amount may be calculated based on your net salary (your annual salary after taxes have been taken out), and some plans limit how much you can receive per month. Also, it’s important to note that bonuses or commission may not be included.

Once you’ve determined the potential payout, calculate whether your policy will be enough to cover your mortgage and bills for an extended period, and consider whether it will be enough to keep you in good financial health. Ten times your annual salary as an insurance payout amount is a good starting point, but you may need more if you have considerable debt or a large family.

Finally, it’s also important to consider inflation. “One million dollars may sound like a lot of money, but you need to consider what that will be worth 20 or 30 years from now,” says Nonnengard.

Evaluating Your Policy

The cost of disability insurance depends on many factors, including your income and debts, your age and health, and your family’s future needs. Disability insurance premiums are calculated based on several factors, including your age, gender, the type of work you do, and how much of your income you want to insure. For example, the premium paid by an office worker might be lower than what a firefighter might pay. And because short-term disability claims frequently relate to pregnancy complications, women of childbearing age may also pay higher premiums.

When evaluating a disability insurance policy, consider these additional policy elements:

• Elimination period: The length of time you will need to wait before your benefits will kick in.
• Benefit period: The maximum length of time you will receive benefits. Your policy’s benefit period can be defined in various ways — for a certain number of years, up to a certain age, for your lifetime, or through some other definition.
• Benefit amount: The amount of money you’re eligible to receive. As with any type of insurance, the larger the coverage amount, the more expensive the policy will be. If possible, look for a policy with benefit adjustments that keep pace with the cost of living.
• Occupation: Some policies will continue to pay benefits if you're unable to return to your present occupation, while others will stop paying if you're able to return to a job that matches your education and experience.
• Guaranteed renewable and non-cancelable: If it’s available and affordable to you, look for a policy that you can carry with you as you age without risk of cancellation or premium increase by the insurance company.
• Partial disability riders: A partial disability rider will enable you to collect a portion of your benefits if you return to work part time.

Finally, remember that when it comes to purchasing disability insurance, the sooner the better. Since it’s harder and more expensive to get insurance as you age, preserving plans you purchased when you were younger may save you money and offer greater protection down the road.

By carefully considering your family’s needs in the short and long term, you can find the disability insurance policy that’s right for you. To learn more about protecting your property and financial future, visit regions.com/insights.