Disability insurance offers coverage to individuals when they go through an experience or situation that prevents them from working for an extended period. The plan replaces some of a person’s income depending on the type and coverage offered by the insurance. Disability insurance doesn’t cover medical or long-term care.
There are three types of disability insurance:
The Social Security Administration (SSA) provides disability insurance to individuals who have worked for a period of time and contributed part of their earnings to the Federal Insurance Contributions Act (FICA) tax. FICA taxes help fund Medicare and Social Security. Disability Insurance through SSA will last up to six months for disabilities that last over one year.
The other two types of disability insurance are individual policies or employer group policies. Different policies may require different waiting periods, benefits, or features. Costs may vary due to special benefits or risks including gender, smoker status, occupation of an applicant, age and health.
There are also different types of disability plans: short term and long term disability insurance. Short term disability insurance will offer coverage to an employee between 3 to 6 months. Long term disability insurance will offer coverage after 6 months of disability and will be indefinite or until a person is no longer disabled. Coverage may vary between plans. Short term disability policies usually offer between 60% to 70% worth of income reimbursement. Long term disability policies usually offer between 40% to 60% worth of income replacement.
Many individuals prefer to customize their own policy. Doing so provides more ability to add extra features including an annual cost of living adjustment or to capture an increase to a person’s earnings. An individual may choose a preferred insurance company with better policies and practices. Another benefit of individual policies is that coverage and participation in the plan isn’t contingent upon employment with a company. Individual policies also provide income free of taxes, whereas an employee would need to pay taxes on their employer sponsored STD benefit.