Disability insurance
Insurance that replaces a portion of your income if you're unable to work due to illness or injury.
Definition
Disability insurance replaces a portion of your income if you become unable to work due to a covered illness or injury. It's often called "income protection" — because that's exactly what it protects.
Two main types:
- Short-term disability (STD): Covers 50–80% of income for a short period (typically 3–6 months). Kicks in after a short elimination period (the waiting period before benefits begin — usually 0–14 days).
- Long-term disability (LTD): Covers 50–70% of income after short-term benefits end. Can last for 2–5 years (own occupation, to retirement age, or to age 65 depending on the policy).
Employer-provided vs. individual:
Most employers provide some group disability coverage, but it's often limited — typically 60% of base salary, with a 90-day elimination period, and benefits may be taxable if the employer paid the premiums. Individual policies are more comprehensive but more expensive.
Own occupation vs. any occupation: "Own occupation" policies pay if you can't perform your specific job. "Any occupation" policies only pay if you can't perform any job for which you're reasonably qualified. Own occupation definitions are significantly more protective.
The risk most people ignore: You're 3x more likely to become disabled during your working years than to die. Social Security disability is notoriously difficult to qualify for. Without disability insurance, a long illness or injury can be financially catastrophic.
Examples
A surgeon develops essential tremor and can no longer perform surgery. An own-occupation disability policy pays benefits even if she could still work as a consultant.
Your employer provides short-term disability covering 60% of your salary for up to 26 weeks. After 26 weeks, long-term disability kicks in at 60% until you return to work or reach 65.
A freelancer has no employer-provided disability coverage. An individual policy costs $150/month but would pay $5,000/month if they're unable to work — a financial lifeline for a self-employed household.
Frequently asked questions
Does my employer's disability insurance cover everything I need?
Often not. Employer LTD typically caps at 60% of base salary (bonuses and commissions excluded), may have a dollar maximum, and often uses an 'any occupation' definition after 2 years. Supplemental individual coverage can fill those gaps.
How long is the elimination period?
The elimination period is the waiting time between becoming disabled and when benefits begin. Short-term policies often have 7–14 days; long-term policies typically have 90-day elimination periods. The longer the elimination period, the lower the premium.
Is disability insurance worth it if I have savings?
That depends on your savings. If you can fund 2–3 years of expenses from savings alone, you may be able to self-insure short-term disabilities. Long-term disability (5+ years) is harder to self-insure — even with substantial savings.
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