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Disability Insurance

Updated on January 5, 2024
Article byKhalid Ahmed
Edited byprarthana Khot
Reviewed byDheeraj Vaidya, CFA, FRM

Disability Insurance Definition

Disability insurance refers to an insurance plan that covers the risk of joblessness of a person due to any disability caused due to accident or illness by paying partial income to the person. It protects an insured person’s finances from the monetary risks of accidents or illnesses.

Disability Insurance
Figure 1. disability insurance

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A person must have a self-owned business or occupation to claim this insurance. Insurance companies determine insurance coverage based on income needs. Longer periods of coverage ensure better returns to the insured entity in case of disability. A person can get coverage under this scheme only on meeting the definition of disability under the Social Security Administration (SSA).

Key Takeaways

  • Disability insurance can get defined as a special insurance scheme of insurers to cover the disability of a person by providing income regularly as per the premium paid.
  • It helps a lot in the proper rehabilitation and medical treatment of the insured and is a source of income for the family to meet its daily expenses.
  • It has many benefits for the insured, mainly getting a mental piece and monetary support to the disabled person and their family in case of disability.
  • Disability insurance is of two types, namely- short-term insurance and long-term insurance, depending upon the nature of the disability.

Disability Insurance Explained

Disability insurance refers to an alternative source of income for the subscriber of the insurance when they get unemployed due to illness, accident, or disability. An individual can get it either through the employer or by themself through private insurers or by enrolling in an SSA disability plan or national disability insurance scheme via the government. The policies have either long-term or short-term duration. Every insurer providing it has a ninety-day waiting period before activating the subscriber’s insurance benefits.

Disability can occur in anybody’s life without warning. When afflicted on a person, their business or employment gets disrupted. As a result, the employee or person may not be able to cover his medical expenses, fulfil daily expenses of self and family, pay the bills of the household and self, and fail to get rehabilitation after the disability. So, financial hardships occur, forcing them into bankruptcy, debt, or poverty.

Therefore, disability insurance comes in handy in battling these financial crises for a person. However, this insurance does not provide full salary benefits to the individual but provides at least forty-five to sixty-five percent of one’s gross salary. SSA or state disability insurance also provides such coverage to American citizens, but beneficiaries could seek additional insurance from a private insurer without any insurance.

Premiums depend on factors like age, sex, length of insurance, and level of risk involved in a profession or business. The deduction of premium is directly proportional to one’s income. Companies cover only those disabilities that hinder one from performing physical and material duties under this insurance scheme. All the benefits received under it get tax exemption on insurance initiated privately. However, employer-initiated insurance benefits are not tax-exempted.

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Types Of Disability Insurance

Disability insurance comes in two categories, namely:

#1 – Short-Term Disability Insurance (STD)

It provides short-term coverage for subscribers who get to stay away from their work for a short period. Here, the companies cover illnesses, accidents, and injuries leading to temporary disability from work for up to two weeks. It gets activated for the subscribers after 14 days of subscription to the insurance. The coverage may last for a maximum of two years.

#2 – Long-Term Disability Insurance (LTD)

Long-term insurance starts after the short-term disability insurance gets completed for an employee. It covers illnesses, accidents, and injuries leading to permanent disability from work for life. It gets activated for the subscriber after 90 days of subscription to the insurance. The coverage may last for a minimum of two years to a maximum of a lifetime for an individual.

Examples

Let us look at a few disability insurance examples to understand the concept better.

Example #1

Let us suppose a business owner A has a business making pens in Pennsylvania. The person, A, has a family consisting of parents, kids, and a spouse. Everyone depends on the businessperson, and they require $1000 on average as monthly income to maintain their expenditure. However, one day, A meets with an accident on the road with a speeding truck. One of his hands gets mutilated, and A gets hospitalized, rendering the pens business to halt operations.

Since A was unaware of the disability insurance plan, A’s family suffered through the financial crisis and accumulated debt. Moreover, the hospital expenses increased, making him sell the business to its rivals. Nevertheless, A had enrolled in SSA a while back which came in handy in managing some of his bills. But, if A had taken insurance for himself earlier, the insurance could have covered his medical cost. However, the insurer provided monthly family expenses and ensured proper rehabilitation of the mutilated hand. But disability insurance would have saved the pen business of A as well.

Example #2

In this example, let there be software-professional B in Silicon Valley. B earns handsomely and manages the family. B’s employer ensured long-term disability insurance benefits to every employee till their tenure in the company. B also obtained short-term disability insurance from a private insurer at a good rate.

One day, the company doctor diagnosed B with a slipped disc as B could not sit on a chair to do official work. Thus, he got bed rest for two months which consisted of 15 days of paid leave and 1.5 months of leave without pay. Therefore, B contacted the insurance provider to activate the short-term insurance clause for 1.5 months. Hence, the insurance provider took care of their monthly bills for B and gave a partial salary based on the amount applicable to B.

Thus, one can see that disability insurance acted as a lifesaver to B and their related family, who survived on the partial income given by the insurer, rehabilitation costs of B, payment of monthly bills, and tax-free income in the absence of leave without pay.

Example #3

Some low-income people, unable to work due to long COVID-19 or long-haul COVID-19, may qualify for SSDI (Social Security Disability Insurance). The Americans with Disability Act (ADA) protects these patients under Title II and Title III. According to the president of Retirement Genius, Chris Orestis, other states and federal laws also give disability insurance protection once the insurers satisfy the required criteria.

According to the Department of Health and Human Services, physical or mental impairments substantially limits the long COVID-19 patients’ eating and caring ability. During such times, the insurance provides monetary help if all the requirements are met. The patient should navigate the SSA.gov website to check the SSDI application page.

An attorney specializing in handling disability insurance or SSDI benefits may help get quick coverage by avoiding mistakes and minimizing delays.

Benefits

Anyone can suffer an accident or illness in their life as a human being’s life is uncertain. As a result, people may suffer either temporary or permanent disabilities. In both cases, one cannot work and earn enough to pay their monthly bills or feed their family. In such cases, disability insurance benefits prove to be a lifesaver.

So, the benefits of disability insurance include the following:

  • It provides continuous monetary support for maintaining daily living expenses for the insured person.
  • The insurance provides beneficiaries of the insured to get taken care of.
  • Disability insurance takes away the stress from the recovery process of the suffering of the insured, allowing speedy recovery.
  • One insurance stand valid for multiple jobs of the insured.
  • The insured gets the tax-free insurance amount from the insurer in full.
  • It provides a safety net for the insured from getting into debt while paying for rehabilitation after disability to the insured.
  • Moreover, it provides peace of mind to the insured regarding the entire family’s monetary help, rehabilitation, and expenses.

Frequently Asked Questions (FAQs)

Is long term disability insurance similar to permanent disability insurance?

Long-term insurance is similar to permanent insurance as both tend to help the disabled person to get enough monetary compensation throughout his lifetime to sustain the everyday expenses and rehabilitation.

Is disability insurance tax deductible?

As per insurance regulators, the private insurers’ premiums paid for the insurance get no tax exemption from the government.

How much is disability insurance?

The cost and benefits of disability for a person can vary depending on the age, duration of the policy, gender, riders, and occupation. Nevertheless, on average, an employee or an individual gets to pay almost one to three percent of one’s gross annual salary. It means that a person earning $50000 annually may pay a premium of around $41.5 to $125 per month or $688 to $1500 annually to the insurer.

This has been a guide to what is Disability Insurance and its definition. Here we explain it in detail along with its types (Long Term and Short Term), examples, & benefits. You may also find some useful articles here:

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