Defining disability insurance

Amy Higgins

According to the Insurance Information Institute, 43 percent of Americans who are now 40 years old will experience a disability that lasts 90 days or more by the time they reach age 65.

Health insurance covers medical bills, but not wages and living expenses. If you're not bringing home an income, paying for things like a mortgage, credit card bills, groceries and vehicle maintenance may seem unfeasible unless you prepare. Disability insurance can help pay for living expenses if an injury or illness leaves you unable to work.

There are two main types of disability insurance policies: short-term and long-term. Most policies of both types come with a waiting period, the amount of time you must be disabled before you can receive benefits.

According to the Insurance Information Institute, short-term disability policies usually have a waiting period of up to 14 days, with a maximum benefit period of no longer than two years. Long-term disability policies, meanwhile, generally have a waiting period of several weeks to several months, with a maximum benefit period that lasts from a few years to the rest of your life.

You can obtain disability insurance benefits through your employer or Social Security (under certain circumstances). If these options aren't available, you might want to look into buying coverage through an insurance provider.

The insurance avenue

You can buy disability insurance through agents or companies who sell health, life, business or auto insurance. While shopping around, pay attention to the policy's definition of disability. Some policies will pay benefits only if you are unable to perform any job, while others will pay if you are unable to perform your current job.

For a higher price, you can purchase an "own occupation" policy, which defines disability in terms of your own occupation for the initial two or three years and then continues benefits if you are unable to perform any job, according to the Insurance Information Institute.

Some insurers will let you customize your disability insurance. For instance, Mutual of Omaha's Disability Income Choice Portfolio offers long-term disability insurance that allows a policyholder to select the waiting period, benefit period and options.

The Insurance Information Institute suggests considering some of the following options when buying a disability insurance policy:

  • Waiver of premium provision: This lets you stop premium payments after you've been disabled for 90 days.
  • Residual or partial disability rider: If you are partially disabled yet have the ability to work part time, you can receive a partial disability payment along with your part-time salary.
  • Additional purchase options: You will be allowed to purchase additional insurance down the road.

Mutual of Omaha's Disability Income Choice Portfolio offers optional riders like a critical illness benefit, which pays up to $25,000 in a lump sum benefit for certain diseases specified in the policy. You also can include a hospital confinement indemnity benefit that pays up to $500 for each day you're confined to a hospital.

It's a good idea to ask your insurance provider if your policy includes a survivor benefit, which would pay your beneficiaries a portion of your disability benefit if you should die while it is in effect.

Employer-sponsored vs. individual coverage

According to the Insurance Information Institute, employer-sponsored disability insurance is required in most states. While most employers provide some short-term sick leave, many larger employers also provide long-term disability coverage with benefits of up to 60 percent of your salary.

Even if you have employer-sponsored coverage, an individual disability income policy is the best way to ensure adequate income in the event of disability, as you can expect it to replace 50 percent to 70 percent of your income, according to the Insurance Information Institute. Moreover, disability benefits aren't taxed if you've been paying the premiums yourself; if your employer has been paying your premiums, your benefits are taxed.

If you have disability insurance through several sources, there are "coordination of benefits" rules that will decide which policy will pay first. However, it won't be possible to get all of your income covered by disability insurance coverage, as insurers want you to return to work.