How Will You Live if You Can’t Work? Disability Insurance 101

Private disability insurance can offer excellent coverage. But it’s expensive. Here’s how to know if you need it and how much to buy.


What are the chances you’ll become disabled? Pretty slim, you’re probably guessing. However, the average 20-year-old worker has a greater than one-in-four chance of being disabled by sickness or an injury before age 67, the Social Security Administration says. Of course, the odds are also related to what you do for a living. “[P]eople with white-collar jobs who lead healthy lives will have much lower odds,” The New York Times points out.

What would you live on?

Maybe the better question is, what will you live on if you can’t work? “When you consider that the average person maybe makes $50 grand a year, if you knock off 10 years (your working years) that’s a half a million dollars,” USA Today contributor Jeff Reeves says in this video. That’s a lot of money to replace.

That makes disability insurance an important consideration. It’s probably a good idea to buy enough insurance to replace about two-thirds of your income if you are disabled from work. Below are sources for disability insurance, including the two programs that make up the tattered safety net provided by the state and federal government.

Bear in mind that illness and injuries that happen outside work aren’t insured.

“Most people go out of work for reasons having nothing to do with work,” says Carole Harnett, president of the Council for Disability Awareness.

A few states (New Jersey, Rhode Island, California, Hawaii and New York, plus Puerto Rico) have “statutory disability” funds that pay workers benefits in case of nonworkplace injuries and illness. (Here are details on those plans from TotalBen, an insurer.)

Here are six options for disability insurance, from cheapest to the priciest:

1. State: workers’ compensation insurance

Workers’ comp also is called industrial insurance, or labor and industries insurance. Employers of a certain size must pay into state insurance funds that provide short-term benefits for workers disabled by illness or accidents at work. Workers pay nothing for the insurance.

Benefits include medical care related to your disability and — if you leave work — payment of a percentage of your salary for a limited time. To qualify, your on-the-job injury must be evaluated and recognized by the state.

Who’s covered: Employees of companies that pay into state workers’ compensation funds are eligible to make claims. Rules and benefits for state workers’ comp programs differ a great deal. State & Local Government on the Net has links to the state programs.

Who’s not covered: Plenty of workers fall between the cracks. In fact, “workers’ compensation payments cover just 21 percent of lost wages and medical costs of work-related injuries and illnesses,” writes Business Management Daily, citing a report by the federal Occupational Safety and Health Administration. News agency ProPublica’s recent investigation, The Demolition of Workers Comp, reports on states’ drastic reductions of workers’ comp benefits.

For a few examples, you may not be covered if (depending on your state’s rules):

As an independent contractor you are responsible for paying your own taxes, Social Security, unemployment taxes, workers’ compensation, health insurance, and other benefits. In addition, you and your client should understand the differences between an independent contractor and an employee, as well as your legal rights and responsibilities.

  • You work for a small employer. The III says:

Many states exempt employers with only a few employees from mandatory coverage laws. The threshold number of employees that triggers mandatory insurance is either three, four or five, depending on the state.

2. Federal: Social Security Disability Insurance

In addition to retirement benefits, Social Security has two programs that are unrelated to retirement. One is SSDI, a safety net for workers who can no longer do any type of work in any occupation and their families. Another is SSI, a program that supports people who are disabled, typically from a young age.

To collect SSDI, it’s not enough to be unable to work in your profession. You must be unable to work at all, in any profession — in a call center, for example, even if you used to be a teacher or pipe fitter. Social Security’s disability planner can help you see if you qualify.

SSDI’s payouts are relatively small. They are based on a formula that takes into account your average lifetime earnings before the disability began, and they may be reduced if you receive other income — workers’ compensation, for example. According to Nolo, the legal publisher, in its section on disability law:

Most SSDI recipients receive between $300 and $2,200 (monthly). The average SSDI payment in 2015 is $1,165. The maximum disability benefit in 2015 is $2,663.

Adds Harnett:

Once you are approved (for SSDI), you become eligible for Medicare for your health insurance. That helps a lot.

3. Workplace private disability insurance

There are two types of disability insurance, short-term and long-term. Writes The New York Times:

Many large employers still provide it gratis, but an increasing number are lowering the payouts and giving employees the option of purchasing more. Other employers may pay nothing toward the premium and simply give workers the opportunity to buy it with their own money via payroll deduction.

Short-term disability plans. Just 23 percent of American workers have employers who offer short-term disability insurance, according to the Bureau of Labor Statistics.

Short-term plans usually typically require you to be out of work eight to 15 days before you can collect, Harnett says. Benefits last for three to six months. A few plans pay 100 percent of salary. More often, 66 percent is the top amount paid (larger payments are a disincentive to return to work.)

Long-term disability plans. About 34 percent of workers are offered long-term disability plans through their employers, according to the BLS. Usually you must wait three to six months before you can collect benefits, according to Harnett.

Even if your employer pays for a disability plan that replaces some of your salary, you may need add to the coverage — called “buying up.” The goal usually is to buy enough insurance to replace 66 percent of your salary.

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