Guides / Life Events

Disability Insurance: What to Look For

For most working people, earning power is the largest financial asset they own, yet it's the one most often left unprotected. Here's how to evaluate whether your coverage is adequate.

Planning for the worst case

Most people carry life insurance, but far fewer carry long-term disability coverage, even though workers are statistically more likely to experience a long-term disability, one lasting longer than 90 days, than to die during their working years. Social Security, workers' compensation, and employer-provided coverage are all frequently inadequate on their own, which is why a private supplemental policy is worth evaluating even if you have some coverage already through work.

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Employer-provided coverage

If your employer offers long-term disability coverage, it's generally worth taking, since the premiums are usually discounted relative to an individual policy. But review the details carefully before assuming it's sufficient. Check how long the coverage lasts, since some group policies pay out for only a few years; how the benefit amount is calculated, since coverage is generally capped at around 60 percent of income; and who pays the premium, since disability benefits are tax-free if you pay the premium yourself with after-tax dollars, but taxable if your employer pays with pre-tax dollars. Also confirm whether bonuses or commissions are covered, and understand exactly how the policy defines "disability."

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Government coverage

Workers' compensation covers on-the-job injuries and calculates benefits based on your average salary at the time of injury, with amounts varying significantly by state. Social Security also provides long-term disability coverage, but more than half of applicants are denied, and the average monthly benefit is typically well below what most people would need to maintain their standard of living. Veterans with service-related disabilities may qualify for additional state-level benefits worth checking into.

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What to look for in a private policy

Disability insurers generally won't cover more than about two-thirds of your income, so be ready to document your income level when you apply. Pay close attention to how the policy defines disability: own-occupation coverage pays out if you can't work in your specific field, and is the broadest and most expensive option; any-occupation coverage pays out only if you can't work in any field suited to your training, a much narrower standard; and income-replacement policies, the least expensive of the three, simply replace whatever portion of your income you can no longer earn.

Other terms matter just as much. A longer waiting period before benefits begin, typically 30 to 90 days, lowers your premium, so it makes sense if you have savings or short-term coverage to bridge the gap. Check how long the benefit period lasts; many policies cover only two to five years, which may not be enough unless you're close to Social Security age. And confirm whether residual benefits are included, which pay out if you can only work part-time rather than being fully unable to work. Finally, understand whether the policy is noncancellable, meaning your premium is fixed for the contract term, or merely guaranteed renewable, meaning the insurer can raise your rate later.

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Riders and options

A handful of optional riders are worth understanding before you buy. A future-increase option lets you add coverage later without new health underwriting, usually for about 10 percent more premium, and is worth having if your income is likely to grow. A cost-of-living rider increases your benefit after you become disabled to keep pace with inflation, typically adding 20 to 40 percent to the premium. A Social Security offset rider, which reduces your benefit if you also qualify for Social Security disability, is usually worth taking since it lowers your premium. A waiver-of-premium rider, which stops your premium payments once you're disabled, is generally a good value. A return-of-premium rider, offering cash back if you never file a claim, usually isn't worth it, often adding 50 percent or more to the premium for a benefit you may never use.

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Premium-reducing tips

A few practical moves can lower what you pay. Look for a low-load policy sold on a reduced-commission basis through an independent agent. If you're young, consider an annual renewable policy and convert to a permanent one later when premiums are more affordable relative to your income. Group coverage through a trade association can also be cheaper than an individual policy. Always check the financial strength rating of any insurer before buying, since a policy is only as good as the company's ability to pay when you actually need it.

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Frequently asked questions

What's the difference between own-occupation and any-occupation disability coverage?

Own-occupation pays benefits if you can't perform your specific job, even if you could work in a different field. Any-occupation only pays if you can't work in any job suited to your training and education, a much harder standard to meet.

Are disability insurance benefits taxable?

It depends on who paid the premium. Benefits are tax-free if you paid the premium yourself with after-tax dollars, and taxable if your employer paid with pre-tax dollars.

How much of my income can I actually insure?

Most insurers cap coverage at roughly 60 to 66 percent of your income, so full income replacement generally isn't available even with a private policy.

This guide is for general informational purposes only and is not tax, legal, financial, or investment advice. Every business situation is different, so consult a licensed professional before making decisions based on this content.