What Is Disability Insurance?
Disability insurance is a type of insurance that will provide income in the event a worker is unable to perform their work and earn money due to a disability. There are many types of organizations that provide different types of disability insurance. Each organization and disability insurance type have specific rules as to what constitutes a disability and how a person might qualify to receive the disability benefit. This basic insurance is a key social justice concept.
There are two types of disability insurance: short term and long term.
- Individuals must wait through an elimination period before insurance can take effect.
- Disability-income insurance can be purchased privately, and Social Security also provides disability insurance, including special compassionate allowance treatment fort those who are very ill.
- More expensive policies will have more liberal definitions of what constitutes disabled: watch for "any occupation" vs. "own occupation."
Types of Disability Insurance
There are two basic types of disability insurance.
- Short term disability insurance policies offer a worker a portion of their salary if they are unable to work for a short period—typically three to six months.
- Long term disability insurance offers a worker a portion of their salary if they are unable to work for a longer period—typically a period of over six months.
Both short term and long term disability policies have a period that a person must be disabled for before that individual is able to start receiving disability benefits. That period of time is called an elimination period. If a person becomes disabled, they must wait until the elimination period is over before they start receiving benefits. If they are able to work before the elimination period is over, the person will not receive a benefit.
The Social Security Administration also provides disability insurance. Employees who've paid the Federal Insurance Contributions Act (FICA) tax for a certain amount of time, are eligible to receive the Social Security disability income insurance if they meet the strict requirements of disability under the OASDI program.
Disability insurance is also referred to as disability-income insurance.
How Disability Insurance Works
Disability insurance comes in many forms and can be obtained through a wide range of providers for a wide range of prices. The price of a disability insurance policy depends on the length of the elimination period, the benefit period (how long a person is able to receive the disability benefit), and how strict the definition of disability is under the policy. Each policy can have its own definition of what qualifies as "disabled," so it is important to understand these rules before buying a policy.
The two most common definitions are "own occupation," where a person is considered disabled if they are no longer able to perform the occupation they had prior to becoming disabled, and "any occupation," where a person is considered disabled if they are unable to perform any job at all. Obviously, the "any occupation" definition is more strict. All else equal, the policy with the more strict definition of disability will be the cheaper policy because there is less of a chance of an insurer having to pay benefits under a stricter policy.
The U.S. Social Security System has a very strict definition of disability and it can be difficult to qualify for disability payments under the program. There is, however, a Social Security disability provision called compassionate allowances that can speed up this process for very ill individuals. Employees who have become disabled can receive this income insurance for at least one year. Income insurance payments begin on the sixth month of disability.