Disability insurance is a type of insurance that is available to provide income in the event a worker can no longer perform their work due to a disability. Oftentimes this disability prevents them from making money for a period of time (or in some cases for much longer periods).

There are specific rules as to what is considered a disability and how a person might qualify to receive the disability benefit. Short-term policies offer benefits for a short period—typically three to six months. Meanwhile, long-term disability insurance offers benefits to those are unable to work for a longer period—typically a period of over six months.

Limits to Disability Insurance Coverage

Disability insurance policies are designed to partially replace your income in the event that you become disabled and cannot continue to work. To help limit the amount of fraudulent disability claims, it is not feasible for the insurer to replace 100% of the income that is lost due to a disability. Because of this, most insurance companies will only cover up to 60% of the earned income of the insured.

Depending on your profession, there are special cases where insurance companies have made exceptions for certain professions, such as interns, residents, fellows, and physicians, which allows a policy to have coverage in excess of the 60% threshold.

What Is Graded Premium Disability Insurance?

Disability insurance policies for professions under the "special limits" mentioned above typically have a guaranteed level premium cost up until age 65. If you're looking to save money on premiums, maybe because you are new to your profession and not yet earning the big bucks, you can get what's called a "graded premium" disability insurance. This type of policy has the same benefits as level premium policies but the premium starts lower and increases each year.

With a graded premium disability insurance policy, you'll get a low-cost policy with a high level of insurance coverage while guaranteeing your insurability for future years. This is a good low-cost option that helps recent graduates get disability coverage while allowing them time to get established, at which point a decision can be made to find a better policy with level premiums.

How Much Coverage Should You Consider Getting?

A good benchmark in deciding what percentage of income you'll want to aim to replace would be to obtain enough coverage to maintain your family's current standard of living, up to the limits of what is offered by the insurer. While determining how much replacement income you'll need if you become disabled, it is best to go with a conservative estimate to make sure you'll have adequate coverage.

The Bottom Line

If you became disabled and are unable to work, what would happen to your household income? Hopefully, you would be in a position to still take care of your family, but if you're not confident that you can cover a lengthy loss of wages, then it might be a good time to cover that risk with disability insurance.