Disability insurance is an important way to financially protect individuals who are unable to work due to health reasons.

While disability insurance is not a mandatory requirement in many states, it is highly recommended, especially in a country where most people rely on their income to cover daily expenses.

Here’s a complete guide on how disability insurance works in the U.S., its different types, and why it’s an essential part of financial planning.

What is disability insurance?

Disability insurance is a type of coverage that replaces part of a person’s income when they are no longer able to work due to an injury or health condition.

Unlike life insurance, which pays a lump sum to beneficiaries after the insured’s death, disability insurance offers periodic payments while the individual is unable to work.

These payments help cover basic expenses such as rent, food, and medical services.

Many employers offer this insurance as a work benefit, but it can also be purchased privately, giving individuals the choice.

Types of Disability Insurance

There are two main types of disability insurance in the U.S.:

Short-Term Disability Insurance

This type of insurance provides coverage for a limited period, typically between 3 to 6 months.

Its goal is to provide financial assistance while the person recovers from a temporary injury or illness.

It can be useful for individuals with a quicker recovery who need temporary support. The amount paid is usually a percentage of the person’s original salary, ranging from 50% to 80%, depending on the policy.

Short-term disability insurance is often offered by employers as part of a benefits package.

Long-Term Disability Insurance

Unlike short-term insurance, long-term disability insurance provides more extensive coverage, usually for several years or until the person’s retirement.

In some cases, it can even cover the beneficiary’s entire lifetime if the disability is permanent. It is a crucial choice for those facing severe illnesses or injuries that prevent them from returning to work for a long period.

Long-term disability insurance can replace up to 60% or 70% of a worker’s income. The duration of the payments can vary depending on the policy type.

How Does the Claims Process Work?

When someone becomes unable to work, the first step is to contact their insurance provider to start the claims process.

Once the claim is submitted, the insurer will review the information and determine if the insured meets the eligibility criteria.

This may involve medical exams, doctor reports, and other documents to verify the nature of the disability.

After approval, the insured will begin receiving payments as agreed in the policy. The time before the first payment can vary, with short-term insurance typically starting payments within a few weeks, while long-term insurance may take longer.

Therefore, it is very important to have insurance that matches your needs so you’re not caught off guard.

Cost of Disability Insurance

The price of disability insurance varies based on factors such as the type and amount of coverage, as well as the length of the benefit period.

Generally, short-term disability insurance is less expensive than long-term coverage but provides more limited protection.

The percentage of income to be replaced and the waiting period (the time between the start of the disability and the first payment) also influence the price.

On average, disability insurance costs between 1% and 3% of a person’s annual income.

Long-term disability insurance tends to be more expensive, but it offers more extensive coverage and is a valuable investment for those seeking long-term financial security.

Government Disability Insurance

In addition to private disability insurance, the United States offers government programs to assist individuals with disabilities who cannot work.

• Social Security Disability Insurance (SSDI) is aimed at workers who have paid into the Social Security system during their working years and, due to a disability, are unable to continue working.
  Supplemental Security Income (SSI), on the other hand, does not require individuals to have contributed to Social Security. It is intended for individuals with low income and limited financial resources.