Disability Insurance: What It Is, How It Works & Different Types

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A lot of things can go wrong in life, but it's particularly hard to bounce back from a disabling illness or injury, especially when it means you can no longer work. Sometimes, sick days aren't enough to allow for a recovery if a full recovery is even possible. Disability insurance acts as a safety net against a loss of income due to an injury or illness that prevents you from working in the short or long term. Many different types of disability insurance exist and can often be confused with unemployment or workers' compensation.

Who Pays for Disability Insurance?

Unlike workers' compensation or unemployment insurance, employees are responsible for paying for an individual disability insurance plan, and the payments are usually proportional to the individual's annual income. However, as an employer, you can offer disability coverage as part of your benefits package, and you may even pay the premium on a group disability insurance policy. In a way, employers also pay for government-managed disability programs because the employment tax feeds into Social Security benefits.

When an employee needs to use his disability insurance, it's the insurance company's responsibility to make those payouts. On the other hand, if an employee chooses to file for Social Security benefits, the government will send a monthly benefit amount.

Types of Disability Insurance Available

Individuals can obtain short-term and long-term disability insurance through an insurance agency or through an employer-sponsored policy. However, there are also federal and state disability programs operated through the Social Security Administration or state equivalent.

Short-term disability insurance provides monthly checks, typically just a portion of your income before taxes, for up to one year. After that, a long-term disability insurance policy provides financial assistance. Another plan called supplemental disability insurance will provide you with additional income above and beyond what is offered by an employer-sponsored plan.

In addition, you can seek out a policy called mortgage disability insurance to specifically cover your mortgage payments in the event of a disabling illness or injury. Business owners can pay for the business equivalent of mortgage disability insurance, called business overhead expense disability insurance, to ensure their employees, utility bills and rent payments continue to get paid. However, business overhead expense disability insurance will not cover the business owner's salary, so it's important to still take out a long-term disability insurance policy.

Types of Long-Term Disability Insurance

Long-term disability policies are split into two major types: any-occupation disability insurance and own-occupation disability insurance. Any-occupation insurance provides a monthly paycheck during the benefit period (which can be months or years) if you are unable to work any type of job. Own-occupation disability insurance applies when you are unable to work in your former occupation but could potentially work in another field. For example, if a surgeon sustained a permanent hand injury, she could no longer perform surgery but could potentially work a job where dexterity isn't as important.

Own-occupation disability is further split into three different types of policies:

  • True own-occupation disability: Also called "regular occupation," you'll receive benefits if you can't work in your former job but get a different job.

  • Transitional own-occupation disability: You'll receive benefits that specifically cover the pay gap between your former job and your new job when you're no longer able to work in your former job.

  • Modified own-occupation disability: Sometimes referred to as "own-occupation, not engaged," this policy distributes benefits if you cannot work in your former job, and you do not get a new job. 

In addition, the disability benefits provided by the Social Security Administration can be considered long-term care, as the payments will continue until you're able to work or until you reach retirement age. However, the waiting period can take several months or even years when filing for Social Security disability, and monthly payment amounts are relatively restricted, so it's wise to consider a private insurance plan if possible.

State Disability Insurance

A few states or territories have their own disability claim departments:

  • California
  • Hawaii
  • New Jersey
  • New York
  • Puerto Rico
  • Rhode Island

The process for applying for disability benefits in these states or territories varies slightly, but some requirements are the same. For example, in order to be eligible for these state disability programs, employees must meet minimum age and residency/work requirements and have contributed funds in some way, typically by having taxes withheld from wages for a certain period of time. Also, anyone submitting a disability claim must be under the care of a doctor and file documentation that indicates the nature of their disabling injury or illness.

In addition, California, Connecticut, Washington, D.C., Massachusetts, New Jersey, New York, Oregon, Rhode Island and Washington also offer paid family leave, which can act like short-term disability. These state laws allow an individual to take a limited amount of time off to care for injured or ill family members, among other reasons. (Note that all states are required to offer unpaid, job-protected family leave as part of the federal Family and Medical Leave Act.)

What Qualifies Someone for Disability Insurance

In order for your disability payments to take effect, you must have an illness or injury that fits the definition of disability. Some medical conditions automatically fit the definition of disability, while others will require some documentation to be filed with the insurance company or governmental agency. In addition, you typically cannot get disability insurance for self-inflicted injuries, and a pre-existing condition may affect your coverage as well.

In short, if your illness or injury prevents you from doing your former job, the Social Security Administration in particular will consider whether you can do other types of work. If you can, they will not consider you disabled. If your illness or injury significantly affects your daily life or your doctor has placed restrictions on your activity, you're more likely to be considered disabled.

Disability vs. Unemployment vs. Workers' Compensation

Disability insurance is not the same as unemployment insurance or workers' compensation. Unemployment insurance provides temporary and short-term financial assistance while an individual is between jobs but is capable of working and is actively seeking a job. Workers' compensation is paid by employers when an illness or injury occurs while an employee is on the clock and for which the employer may be held liable. Sometimes, benefits can be obtained from more than one program, such as from individual disability insurance and Social Security disability.

Should You Offer Disability Insurance?

Offering disability insurance alongside other benefits like health insurance and life insurance can make your employees feel highly valued by your company and can boost morale around the office. However, sometimes a robust benefits package just isn't feasible for a small-business budget. In that case, you can choose to provide education about disability insurance options and help your employees find a policy that suits their needs.

Work with your human resources department (or talk to a human resources consultant) to determine other disability policies you can institute to care for your employees. You can even experience tax benefits by hiring people with disabilities, and it can give other employees some peace of mind to know that you're an accommodating employer.

References

About the Author

Cathy Habas specializes in marketing, customer experiences, and behind-the-scenes management. Cathy has contributed to sites like Business and Finance, Business 2 Community, and Inside Small Business. She served as the managing editor for a small content marketing agency before continuing with her writing career.