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What Is Disability Insurance?

Disability insurance provides income when a policyholder cannot work and earn money because of a disability. In the United States, people can obtain government disability insurance through Social Security or buy coverage from private insurers.

 

How Does It Work?

Insurance often protects against a specific loss—for example, property and casualty coverage reimburses the value of stolen property. With disability insurance, compensation relates to income lost because of a disability.

For example, if a worker earned $70,000 annually before a disability prevented continued work, insurance would replace part of that lost income, provided the worker qualifies. In this sense, it essentially covers the disabled worker's opportunity cost.  

 

An insured person must meet certain conditions to receive benefits. To qualify for government-sponsored disability insurance through U.S. Social Security, applicants must show that their disability is severe enough to prevent any meaningful work.

 

Some private plans, by contrast, require only that applicants show they can no longer perform their previous occupation. Social Security also requires proof that the disability is expected to last at least 12 months or result in death. 

 

As with all insurance, disability plans cost more when their terms are more favorable to policyholders. 
Less generous plans generally have lower premiums.

Key features affecting premiums include the length of the "elimination period"—the wait after disability begins before benefits start; the "benefit period"—how long payments continue; and how strictly the policy defines "disability."

 

How Much Does It Cost?

Cost depends on many factors, including the insurer and policy features, but a rough estimate is around 2% of the insured's annual salary. Individuals naturally differ in how much they are willing to pay for greater or lesser protection against disability.

 

An Example

Consider two workers. The first is a highly specialized professional whose field required ten years of education and who earns $300,000 annually. This worker can afford relatively expensive disability insurance with a flexible definition of disability. The second has no specialization and earns around $40,000 annually.

The second worker chooses a lower-premium plan even if it has a stricter definition of disability. In addition to fewer resources for premiums, this worker has less ability to work outside their current occupation without investing in specialized training elsewhere.

What Is Social Security Disability Insurance (SSDI)?

Social Security Disability Insurance is a federal income-benefit program providing financial assistance to Americans with disabilities. Generally, according to the Social Security Administration (SSA), benefits go to people unable to work for a year or longer because of a disability. Qualifying individuals receive monthly payments.

SSDI is an earned benefit. To qualify, you must previously have paid into the program and accumulated enough credits, based on work history. Because SSDI is disability insurance, eligibility also depends on SSA medical criteria and is determined through an application process.