How Does Disability Insurance Work?

There are actually two types of disability insurance. Short-term disability insurance replaces a portion of your paycheck for a short period of time. Think three to six months. Most people get STDI through their employer. 

Long-term disability insurance (LTD), on the other hand, provides coverage if you’re out of work for a longer period of time. Think years or even decades. It, too, is sometimes offered by employers, but the benefit is less common. You can also take out an individual long-term disability policy if the benefit isn’t provided by your employer. Policies generally fall into two buckets:

  • Own occupation disability insurance: This policy defines a disability as the inability to work at your regular occupation, even if you still might be able to work at another occupation. For example, a surgeon with hand tremors who takes a job as a medical school lecturer would be eligible for benefits under an own occupation policy because he can’t perform the duties of his own occupation.
  • Any occupation disability insurance: To qualify as disabled under this policy, you must be unable to work at any occupation. This is a harder policy to claim benefits from, but it’s also usually less expensive than an own occupation policy.

If you can afford an “own occupation” policy, that’s what you should get. We also recommend a non-cancelable and guaranteed renewable policy (sometimes only available as a rider). Non-cancelable means the insurer can’t change the terms of your policy (including the premium rate), as long as the premiums are paid. “Guaranteed renewable” means your policy can’t get canceled so long as your premiums are paid.

LTD and STDI policies work best in tandem. That’s because long-term disability insurance doesn’t kick in right away. There’s an elimination period you’ll wait out. It’s usually anywhere from 30 to 365 days … or hopefully right around the time your short-term disability insurance expires. LTD policies typically pay out for two, five or ten years or until retirement. The average individual disability claim lasts for a little under three years, according to the Council for Disability Awareness. Disability insurance can help you if you need long-term care.