Disability Insurance: Who Should Have It?

Approximately one-quarter of workers in their twenties will face a disability prior to age 65. And of Americans between the ages of 16 and 64, 21.4 million have some form of disability that limits (or prevents) them from working.¹

Disability creates a disruption to your ability to earn an income. Given the risk of becoming disabled at some point during your prime working years, it’s important to consider the role disability insurance can play in providing a replacement for lost wages and earnings.

3 Ways to Obtain Disability Insurance

Traditionally, disability insurance benefits are obtained (by many workers) in three ways:

• Social Security Disability Insurance (SSDI): A portion of the 6.2 percent in FICA withholding you and your employer pay for Social Security benefits.²
• Group disability benefits: An employee benefit providing short-term (typically 30 days, 13 weeks, up to 12 months) and/or long-term (two, five, 10 years or to age 65) benefits for non-job related disabilities (disabilities resulting from job-related activities are covered under workers’ compensation insurance).
• Individual disability insurance: Protection you buy to cover injury, illness or sickness which may occur both on and off the job.

Social Security Disability Insurance (SSDI)

Many people look to SSDI benefits as a way to meet their income needs when a disability occurs. SSDI pays a benefit to those considered insured (having met the qualification based on work and paying into the Social Security system). You are considered disabled if you are unable to perform the principal duties of the work you are trained for by experience or education and unable to perform any other job or duty. Additionally, as a result of the disability, you are expected to die or the condition is expected to last at least 12 months or more.³

Data provided by the Social Security Administration for 2001–2010 found that of the disability claims made, roughly 45 percent were approved.³ It should be understood that once benefits are approved, an additional five-month waiting period is in place before benefits are paid to you. You do not receive disability payments for the period of time you wait to be approved or for the five-month waiting period.

Group Disability Benefits

One way to avoid the issue of waiting on SSDI benefits is by utilizing the group benefits offered by your employer.

Group benefits can fulfill the income gap waiting on SSDI benefits creates. It is important to note, however, that your disability must have originated while you were not on the job - remember, job-related injuries are handled through workers’ compensation. Also, the extent your employer pays for the benefits means part or all of the benefit you receive becomes taxable, further reducing the amount of income you receive while disabled.

Individual Disability Insurance

Individual disability insurance is the coverage you purchase to meet the challenge of earning an income in the event that you become disabled. Most policies will cover you if the disability occurred on and off the job. Additionally, the definition of disability in most individual policies tends to be broader than that used for SSDI.

Many policies will pay if you are unable to perform the principal duties of the work you are trained to do and may continue to pay a reduced benefit if you are able to return to other work or if you are partially disabled but able to return to work.

Because you pay the premiums, the benefits tend to be tax-free, allowing you to keep more of the benefit. A policy pays a portion of your monthly income up to a stated percentage (such as 60, 67 or 70 percent, depending on the insurance company). The reason why you do not receive 100 percent of your income is that the policy is designed to prevent against “malingering,” which is a disincentive to recovering from an injury or disability and returning to work because benefits received are the same or more than working.

Who Should Own Disability Insurance?

The probability of becoming disabled during your lifetime before reaching age 65 is enough for you to give serious consideration to owning disability insurance. If you are fortunate to work for an employer who provides this benefit, it is in your interest to take advantage of it. Understand, however, that this may not be enough to provide you with the income you need to meet your financial obligations while disabled.

If you do not have a group benefit available to you, the cost of individual coverage could be a worthwhile expense to protect your income. An accident at or away from work can leave you without the ability to provide for yourself or your family. Disability insurance helps you protect against this risk.