What Is Disability Insurance?
Let me explain disability insurance directly to you: it's an insurance product that steps in to provide income if you're unable to work and earn due to a disability.
Here in the United States, you can get this coverage from the government via the Social Security System, or you can buy it from private insurance companies.
Key Takeaways
- Disability insurance is a type of insurance protecting against loss of income due to disability.
- Disability insurance is available through both public and private programs.
- Some of the variables affecting the cost of disability insurance include the strictness of requirements for qualifying under the plans; the amount of income to be replaced; the length of time in which benefits are paid; the medical history; and the length of time policyholders must wait before beginning to collect those benefits.
How Disability Insurance Works
You know how most insurance covers specific losses, like property insurance paying for stolen items? Well, disability insurance is different—it compensates for the income you lose because of a disability.
Take this example: if you were earning $50,000 a year before a disability stops you from working, your policy would pay a portion of that lost income, as long as you qualify. Essentially, it covers the opportunity cost of not being able to work.
In reality, there are strict conditions you must meet to get these payments, especially with the U.S. Social Security System. To qualify for government disability, you have to prove your disability is so severe it stops you from any meaningful work whatsoever.
Private plans might be easier; you could just need to show you can't continue in your specific line of work. Social Security also demands proof that the disability will last at least 12 months or lead to death.
Like any insurance, more favorable terms mean higher premiums, and less generous ones mean lower costs. Key factors include the elimination period—the wait time after disability before benefits start—the benefit period, or how long payments last, and how strictly 'disability' is defined in the policy.
Real-World Example of Disability Insurance
As a rough guide, disability insurance often costs about 2% of your annual salary, but that varies by carrier and policy details like those I've mentioned.
People choose based on what they're willing to pay for better protection. Consider two workers: Worker A is a specialist with ten years of education, earning $250,000 yearly. Worker B is a high-school grad switching jobs, making $30,000.
Worker A opts for an expensive plan with a flexible disability definition, knowing a switch to another field would slash their income, and they can afford the premiums. Worker B picks a cheaper plan with stricter terms, since they have less to spend and their work isn't specialized, making them more open to other jobs.
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