Losing the ability to work—even temporarily—can upend your income, your plans, and your sense of security. Disability insurance exists for that moment. It replaces a portion of your income so you can focus on recovery, not survival. But policies differ a lot. This guide explains the main types, how benefits actually get calculated and paid, and how to choose coverage that fits your life.
Types of disability insurance
Short-term disability (STD)
- What it covers: Temporary disabilities like recovery from surgery, complicated pregnancy, injuries, or short illnesses.
- Benefit amount: Typically 50–70% of your gross income, subject to caps.
- Benefit period: Commonly 3–6 months; sometimes up to 12 months.
- Elimination period: Short waiting period (often 0–14 days) before benefits start.
- Where it’s offered: Frequently through employers; also available as private policies.
Long-term disability (LTD)
- What it covers: Serious injuries or illnesses that keep you out of work for months or years.
- Benefit amount: Often 50–60% of pre-disability income, with maximums.
- Benefit period: Two years, five years, to age 65/67, or for life (depending on policy).
- Elimination period: Usually 90–180 days (kicks in after STD or savings bridge the gap).
- Where it’s offered: Employer group plans and private/individual policies.
Government programs
- What they are: Public disability benefits vary by country (e.g., SSDI/SSI in the U.S., ESA/PIP in the UK, EI sickness/disability benefits in Canada).
- Eligibility: Strict definitions and medical documentation; approval can take time.
- Role: A baseline safety net, often not enough to fully replace income.
Group vs. individual policies
- Group (through employer): Easier to qualify, lower cost, benefits may be taxable if premiums are employer-paid; not always portable if you change jobs.
- Individual (you buy it): Underwritten to your health/occupation, portable, customizable (definitions/riders), benefits generally tax-free if you pay premiums with after-tax money.
Specialty and business policies
- Own-occupation specialty policies: Designed for professionals whose specific job duties matter (e.g., surgeons, pilots).
- Business overhead expense (BOE): Reimburses business expenses if the owner becomes disabled.
- Key person disability: Protects a business against the disability of a critical employee or owner.
- Buy-sell disability: Funds a buyout between partners if one becomes permanently disabled.
What disability insurance is not (but often confused with)
- Critical illness insurance: Pays a lump sum on diagnosis of covered conditions; not tied to inability to work.
- Accident insurance: Pays fixed amounts for specific injuries or services; not income replacement.
How disability insurance works
- Triggering event: You experience an injury or illness that limits your ability to perform work.
- Claim filing: You submit a claim with medical evidence and employer statements (if applicable).
- Elimination period: You wait out the policy’s waiting period before benefits start (you self-fund or use STD/leave).
- Benefit calculation: The insurer pays a percentage of your income, up to policy caps, minus offsets (if applicable).
- Ongoing proof: You may need periodic medical updates to continue benefits.
- Return-to-work or transition: Benefits reduce or end when you recover; residual/partial benefits may apply if you can work part-time.
Key policy features explained
- Definition of disability:
- Own occupation: You’re disabled if you cannot perform the material and substantial duties of your specific job.
- Any occupation: You’re disabled only if you cannot perform any job reasonably suited to your education, training, or experience.
- Transitional/modified definitions: Some policies start as own-occupation and later shift to any-occupation after a set period.
- Elimination period (waiting period):
- What it is: The time before benefits begin (e.g., 90 days).
- How to choose: Match to your emergency fund or STD duration; longer periods lower premiums.
- Benefit period:
- Options: 2 years, 5 years, to age 65/67, or lifetime.
- Trade-off: Longer benefit periods cost more but protect against long-duration disabilities.
- Residual/partial disability benefits:
- Purpose: Pays partial benefits when you can work but at reduced capacity or income.
- Impact: Often the difference between an “all-or-nothing” payout and real-world support.
- Cost-of-living adjustment (COLA):
- Function: Increases benefits annually while on claim to help keep up with inflation.
- Future increase/guaranteed insurability rider:
- Benefit: Lets you raise coverage later without new medical underwriting.
- Non-cancelable vs. guaranteed renewable:
- Non-cancelable: Insurer can’t change premiums or coverage until a specified age.
- Guaranteed renewable: Insurer must renew, but can raise premiums for a class of policyholders.
- Exclusions and limitations:
- Common items: Pre-existing conditions, self-inflicted injuries, certain high-risk activities.
- Mental/nervous limitations: Some policies cap mental health claims (e.g., 24 months).
- Offsets (coordination of benefits):
- Examples: Government disability, workers’ comp, or employer-paid benefits can reduce your LTD payout depending on policy language.
- Taxation of benefits:
- General rule of thumb: If you pay premiums with after-tax money, benefits are typically tax-free; if employer pays with pre-tax dollars, benefits are often taxable.
Comparing popular types at a glance
| Type | Typical benefit | Waiting period | Benefit length | Best for |
| Short-term disability | 50–70% of income | 0–14 days | 3–6 months | Short recoveries, maternity complications |
| Long-term disability | 50–60% of income | 90–180 days | Years or to retirement | Long illnesses/injuries, income protection |
| Government disability | Varies by program | Application/approval time | Long duration if eligible | Baseline safety net |
| Individual own-occupation | Custom % with caps | Customizable | Customizable | Specialists/professionals |
| Business overhead expense | Actual business costs | 30–90 days | 12–24 months (typical) | Small business owners |
How to choose the right coverage
- Map your income gap:
- Take-home needs: Calculate monthly essentials (housing, food, transport, loans, childcare).
- Existing safety net: Add employer STD/LTD, emergency fund, partner income, and family support.
- Pick your definition:
- Own-occupation for specialists: If your exact role is hard to replace (e.g., surgery, technical craft), prioritize own-occupation.
- Modified/any-occupation: Consider only if budget-constrained and impact is acceptable.
- Align waiting period to cash buffer:
- Short buffer: Choose a shorter elimination period.
- Strong savings/STD: Extend to lower premiums.
- Set the benefit period smartly:
- Short runway: 5-year benefit can cover many claims at lower cost.
- Maximum protection: To retirement protects against career-ending events.
- Add riders that matter:
- Residual/partial: Smooths income when you return part-time.
- COLA: Critical for long claims.
- Future increase: Ideal if your income is rising.
- Compare multiple quotes:
- Check apples-to-apples: Same definition, elimination, benefit period, riders.
- Scrutinize exclusions: Especially for hobbies, travel, or pre-existing conditions.
- Mind portability and renewability:
- Individual policies: Follow you between jobs.
- Group plans: Verify conversion options if you change employers.
Real-world scenarios
- Specialist physician:
- Risk: Hand injury makes surgery impossible but allows teaching.
- Fit: Own-occupation policy pays benefits even if working in a different role; residual rider supports partial earnings.
- Project manager with employer LTD only:
- Risk: 60% group benefit taxable; net replacement may drop near 40–45%.
- Fit: Supplemental individual policy closes the gap and is portable.
- Small business owner:
- Risk: Rent, payroll, and utilities continue even if you can’t work.
- Fit: BOE policy covers overhead; separate LTD protects personal income.
Common mistakes to avoid
- Choosing price over definition:
- Why it hurts: Cheaper “any-occupation” policies can deny claims you expect to qualify for.
- Better move: Prioritize own-occupation if your role is specialized.
- Skipping residual benefits:
- Why it hurts: Many claims are partial; without residual, benefits can drop off too quickly.
- Better move: Add residual/partial coverage.
- Underestimating the waiting period:
- Why it hurts: A 180-day elimination period without savings can create a cash crisis.
- Better move: Match elimination to your buffer or STD.
- Ignoring mental/nervous limitations:
- Why it hurts: Caps on mental health claims may not match your risk.
- Better move: Seek policies with stronger behavioral health provisions if possible.
- Assuming group coverage is enough:
- Why it hurts: Taxable group benefits + caps can leave a large gap for higher earners.
- Better move: Layer supplemental individual coverage.
Quick buyer’s checklist
- Occupation definition: Own-occupation, duration, and any transition to any-occupation.
- Benefit amount: Percentage, monthly cap, and offsets.
- Elimination/benefit period: Waiting time and how long benefits last.
- Residual/partial rider: Terms for part-time or reduced-income return to work.
- COLA and future increase: Inflation protection and growth with your income.
- Exclusions/limitations: Pre-existing, mental/nervous caps, activities.
- Portability/renewability: Non-cancelable or guaranteed renewable; job changes.
- Taxes: Who pays the premium and how benefits will be taxed.
FAQs
- Is disability insurance worth it if I have savings?
- Short answer: Yes, for long-duration events. Savings can cover a few months; LTD protects multi-year risks.
- How much coverage should I buy?
- Rule of thumb: Target 60–70% of gross income (consider tax effects) up to policy caps.
- Can I get coverage if I’m self-employed or a freelancer?
- Yes: Individual policies are designed for this; BOE can protect your business expenses.
- What if I recover but can’t earn as much?
- Residual benefits: Provide partial payments based on your loss of income or duties.
- Do pre-existing conditions disqualify me?
Not always: They may be excluded or surcharged; underwriting varies by condition and insurer.