The Basics of Disability Insurance

According to the Bureau of Labor Statistics, a 20-year-old worker has a 30% chance of becoming disabled before reaching full retirement age. Yet only about a third of employees in private industry have long-term disability insurance, according to the government agency. This is further underscored in research conducted by a major life insurer, which indicates that about two-thirds of surveyed Gen Y workers ages 21 to 31 are very concerned about their family’s financial security if the principle wage earner is unable to earn an income due to illness or injury, but only about half of these workers surveyed say they have any income protected with disability insurance.

Those who are self-employed, including physicians, must consider purchasing disability coverage – and even those insured by the medical practice or hospital, looking into whether there is enough insurance is critical.

Following is an overview of disability insurance:

How disability insurance works.

Disability insurance provides for loss of income as a result of the inability to continue to work because of an accident or illness. Typically, there is a waiting period of three to six months before the disabled individual will receive his or her checks. Employers, private insurers, and the Social Security Administration provide this type of coverage. With a group plan, disability coverage is provided through an employer, which pays a portion of one’s salary. Those in high-income professions, such as doctors, often purchase coverage through private insurers – they have made a huge investment in their earning potential and need to protect themselves in the event their ability to meet that potential is curtailed due to injury or illness.

Then there is Social Security Disability Insurance, which provides protection against disability for about 153 million workers through FICA taxes. However, receiving benefits through Social Security Disability Insurance is complicated and can take two or more years for approval. What’s more, the average disability benefit is only $1,111 a month*, and benefits are only provided if the disabled individual is unable to work in any capacity, not just at his or her chosen occupation.

Employer-provided disability income insurance and whether it’s enough.

It’s estimated that about seven in ten employers offer some type of disability insurance coverage. The key is to find out how much coverage is available and whether it’s enough and needs to be supplemented with an individual disability income policy through a private insurer. A typical group plan provided by an employer replaces from 40% to 60% of ones salary, up to a maximum of $5,000 – $20,000 a month (most common is $10,000). For a medical professional, this may not be enough to cover expenses and take care of a family. In addition, if the employer pays the premiums, the checks are taxable. Benefits under this type of plan usually are established for a set number of years or until retirement age. Yet with increased costs, employee benefits have been scaled back with some group policies limiting benefits for only two years. With supplemental professional disability insurance, extra coverage can be obtained to fill in any gaps.

Furthermore, with a highly specialized job, such as those in the medical profession, looking into an own occupation policy is recommended, which is designed to provide benefits if one is unable to perform the major duties of his or her own medical specialty.

Cost of disability insurance.

The cost of disability coverage varies and is based on age, gender, occupation, amount of coverage and health status. A broker can provide disability insurance quotes from various insurers for comparison.

*Based on stats from the Social Security Administration for the month of July.