How to get disability insurance

Getting disability insurance makes a lot of sense: the Social Security Administration estimates one in four of today’s 20-year-olds will become disabled before they reach age 67.¹ If an illness or injury keeps you from working and earning a paycheck, disability insurance can help provide ongoing income to help pay bills, support family members, and maintain your lifestyle. But there are different kinds of disability situations – and different types of policies to cover them. This article can help you get the plan you need by telling you about:

• The main types of disability insurance

• Getting disability coverage through your employer

• Getting private disability policy as an individual

• Getting Social Security Disability Insurance (SSDI) benefits

The two main types of coverage are short term disability (STD) and long term disability (LTD)

The first step to getting disability coverage is deciding what type of protection you need. Disabilities can be caused by illness or injury, but in either case, a short term disability that keeps you out of work for a few weeks or months is much more likely to happen than a disability that keeps you from working for many years. But while rarer, if a long term disability happens, it will likely have a much greater impact on your life. And while both short and long term disability policies are designed to replace up to 60%-80% of your income, they work somewhat differently.²

The biggest difference between the two kinds of policies is the period of time you'll receive income benefits (called the benefit period). As the name indicates, short term disability insurance is intended to cover you for a short-lasting illness or injury that keeps you out of work for a few weeks or months. While policies vary, STD benefits typically last three to six months, and seldom for more than one year. By contrast, LTD is for more severe and even permanent disabilities: benefit periods for long term disability insurance are usually stated in years: 5, 10, 20, or even until you reach retirement age, depending on your plan. Other differences include:

• Cost: STD plans typically cost less than LTD plans, primarily because they only pay benefits for a limited period.

• Waiting period: Also called an elimination period, this is the amount of time after you are disabled until you can start receiving benefits. STD policies generally have shorter waiting periods (15-30 days is common); in an LTD policy, benefits don't typically begin for several months, or even one year

• Definition of disability: Every disability policy has a specific definition of what it takes to qualify for disability benefits. Short term policies generally pay benefits for any covered disability that keeps you from doing your job. But a long term will have one of two types of definitions:

1. An own-occupation definition means you qualify for benefits if a disability prevents you from working in your specialty or field.

2. An any-occupation definition means you only qualify for disability benefits if you can’t do any work at all. 

Plans also work somewhat differently depending on how you get them. There are three main ways to get disability coverage: group coverage through work, an individual plan from an insurance provider, or through the Social Security Administration.

Group disability coverage through your work or an association.

Your company may offer STD or LTD insurance as part of your employee benefit package. If you're self-employed, you may be able to get it through a professional association. Either way, a group disability plan can be an excellent choice: Because the company or association is buying for a large group of people, the premium is typically lower than for an individual policy. In addition, your HR department (or the association's management) will likely have more expertise and leverage to negotiate favorable terms.

An added benefit to getting a policy through your employer is that they may also subsidize a portion of the premiums, further lowering your cost. On the other hand, because the company or association is effectively "buying in bulk," you will may have less opportunity to tailor the policy to your needs. If the premiums are paid with pre-tax dollars (often the case with employee benefits), then the income benefits you get down the road will typically be taxed.

Getting coverage:

Start by checking your benefits portal or paperwork to see if coverage is available, or contact your HR department. Short term disability plans are more likely to be offered, either as a mandatory or voluntary benefit, and some states require STD coverage funded by payroll deductions. However, many employers also offer group long term disability plans. The two types of coverage can complement each other nicely, especially if short term benefits last long enough to provide income until long-term disability benefits kick in.

While group disability plans typically offer fewer riders and features to tailor coverage, the application process is typically simpler than for an individual policy. However, if you leave the company or association, you'll lose your coverage in most cases.

Making a claim:

Depending on your employer and plan, you may be able to apply online for benefits through your employee benefits portal; otherwise, you can ask your HR department or contact the disability provider directly. You should do so as soon as possible after suffering a covered illness or injury to ensure the provider has everything needed to process your claim; assuming the claim is approved, you'll start to accrue benefits at the end of the waiting period.

Individual disability insurance

This is an LTD policy you purchase for yourself directly from an insurance company or through a broker. Since it is (usually) paid for with after-tax dollars, the replacement income it provides is also tax-free. You may have to look around a bit to find an individual STD plan, and if you do, expect the premiums to be somewhat pricey. Long-term disability coverage is typically easier to find, and plans tend to offer a variety of features and options to tailor protection to your individual needs. For example, if you're a specialized professional, such as a heart surgeon, who would lose substantial income if you could no longer perform heart surgery, you can opt for an own-occupation policy that pays benefits if you are able to work in another capacity. Or, for more generalized income protection needs, opt for an any occupation policy that only pays benefits if you can't do any work.

Getting coverage:

Long term disability coverage is most often bought through a financial advisor; if you don’t have one, or if that person doesn’t have much experience with disability policies, a Guardian financial professional can give you a disability insurance quote. Why a financial advisor and not a regular insurance agent? Because disability benefits are meant to replace income – it’s a key part of your overall financial plan. Here’s what to expect in the process:

Researching policies and options: Be prepared to share as much as you can about your financial situation and goals so that they can determine what coverage amount you need and help craft a policy to your needs. Providers typically offer policies with a set of base features plus a variety of optional riders to tailor the policy. Finding the right mix for your needs at a cost that fits your budget may take a bit of time.

Submitting your application: Expect to provide personal, financial, and health information such as age, gender, occupation, income, hobbies/lifestyle, and more. Your financial professional can help with this part.

Remote interview: Once the insurance company reviews your application, expect to have a short phone or videoconference call to provide more in-depth medical, occupational, and other information. The purpose is to give the insurance company a better understanding of your risk of injury or illness that could prevent you from performing your work duties.

Go through underwriting: This is where the provider verifies your information and determines your insurance risk in order to price the policy more accurately. Expect to take a medical exam similar to what's required for life insurance, with a paramedic who comes to your home or office, or provide an attending physician's statement (APS) from your doctor. You'll also need to verify your income via pay stubs, tax returns, or other means.

Making a claim:

Contact the insurance company directly. Claims department information should be clearly spelled out in your policy, and you can typically start the process online. You should do so as soon as possible after suffering a covered illness or injury to ensure the provider has all the information and documentation needed to process your claim; assuming the claim is approved, you'll start receiving benefits at the end of the waiting period.

Social Security Disability Insurance (SSDI)

SSDI is a government-sponsored disability program that is included in your Social Security benefits, so there’s no need to apply for coverage. Premiums are paid for by a portion of your Social Security taxes. The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% of your maximum taxable earnings. If you are self-employed, you pay the entire 12.4%.³ SSDI is strictly a long term disability program, with a six-month elimination period before you can start receiving benefits. There’s no protection for shorter-term disabilities that keep you out of work for a few weeks or months.

Getting coverage:

While there’s no application procedure, the fact that you've paid Social Security taxes doesn’t automatically qualify you for coverage from day one. You also need to have earned a sufficient number of Social Security work credits, which are based on your total yearly wages or self-employment income. You can only earn up to four credits each year, so it takes a long time to become eligible for SSDI benefits. Generally speaking, you need 40 credits, 20 of which were earned in the last 10 years before you become disabled. (However, younger workers may qualify with fewer credits.)

Making a claim:

The Social Security Administration (SSA) has a strict any-occupation definition of disability that covers a specific and limited set of severe medical conditions listed in the SSA’s Blue Book. That means that SSDI only pays benefits for long-lasting or permanent medical issues that make you incapable of doing any work of any kind. If you’re a teacher, a plumber, or a heart surgeon, it doesn’t matter if a disability prevents you from working in your field – you will not qualify for SSDI benefits as long as you are physically able to hold any job, no matter how unskilled or low-paying.

The process of getting SSDI benefits is notably stringent. The initial application requires extensive documentation and can take months to complete – and about 2/3 of these claims are rejected.⁴ While the initial decision can be appealed, the process can stretch out for years. However, if your claim is accepted, you'll start receiving payments once the elimination period is over, and the average monthly Supplemental Security Income benefit is under $1,200.⁵ On the positive side, the benefit period lasts until age 65 (unless your disability resolves itself earlier), at which point you should qualify for Social Security retirement benefits.

How much will you pay for coverage?

Disability insurance cost – especially an individual policy – can vary greatly based on benefit length and amount, age, gender, occupation, and riders, but expect to pay between 1 to 3 percent of your annual salary. That means a person making $100,000 can expect to pay between $83 - $250 per month