Disability Income (DI) Insurance: What It Is and How It Works

What Is Disability Income (DI) Insurance?

The term disability income (DI) insurance refers to an insurance policy that provides income to individuals who can no longer work because of a disability. Disability income insurance helps protect people from financial losses if an accident or illness renders them incapable of working and receiving regular income.

DI insurance is available through employers, Social Security, or insurance companies and comes in short-term and long-term disability coverage. Premiums are based on a number of factors, including a person's age and occupation. Policies pay benefits on a monthly basis.

How Disability Income (DI) Insurance Works

Disabilities can cause a disruption in incomes and prevent people from maintaining their standards of living, paying their bills, or providing for their families. As many as 43% of individuals aged 40 will have a long-term disability ​​​​​​​by the time they turn 65. Enrolling in a disability income insurance policy can help individuals mitigate any losses that stem from an illness or accident that leads to a short- or long-term disability.

DI insurance isn't designed to guarantee 100% of your regular income. Instead, it intends to replace between 45% and 65% of your gross income. As noted above, most employers provide their employees with DI insurance benefits. This type of program is referred to as group insurance coverage. Benefits are also available to insured individuals and their families through the Social Security Administration (SSA). Individuals may choose to purchase DI insurance to supplement existing coverage or if they don't have any insurance at all.

Premiums are based on a series of factors, including your age and occupation. If you work in a field that has a higher risk of injury, your premiums will be higher. The amount of income you receive is also factored into how much you pay for coverage—the more you earn, the higher your premiums. Policies pay benefits in the event that illness, accident, or injury prevents you from performing the material and substantial duties of your occupation. Benefits are tax-free because the policyholder uses after-tax dollars to pay premiums.

Special Considerations

Disability income insurance policies contain a specific monthly benefit amount that is based on your monthly or annual income. For instance, your employer-provided benefit may pay $3,000 a month. Unless stated in the policy language, DI policies do not coordinate with Social Security benefits but pay in addition to it. Look for an indexed policy that keeps up to date with inflation, as your benefits likely won't kick in for some time.

Most insurance companies provide plans that carry a maximum benefit period of two, three, five, or 10 years. However, some companies have plans that pay up to the age of 65, 67, 70, or for the rest of your life. Once again, the price increases to purchase an extended benefit period.

Policies have waiting periods before you're able to receive any benefit payments. This refers to the amount of time or number of days that you are disabled before benefits kick in. These periods, which are also called elimination periods, vary by employer and insurer. The most common period is 90 days. The shorter the elimination period, the more expensive the premium.

Policies do not pay 100% of an employee's salary and may not guarantee job protection. But there are certain protections that come with most policies. Noncancelable policies mean insurers can't cancel the policy for any reason unless you stop paying your premiums. Guaranteed renewable policies allow individuals to renew their policies without any changes. But the insurer may increase premiums at any time.

How to Get Disability Income Insurance

You aren't required to have DI insurance unlike other forms of coverage, such as homeowners insurance. But most employers provide their employees with some type of disability insurance as part of their annual benefits packages. They may also give the option of additional coverage. Premiums are paid through regular payroll deductions.

Workers' compensation is a form of disability insurance mandated by the government. Individuals receive benefits through employers who are covered by the Workplace Safety and Insurance Act. This form of disability insurance covers injuries or illnesses as a result of employment. Compensation usually covers medical fees that are related to an employee's injuries or the equivalent of sick pay during a medical leave.

The quality and scope of the employer-provided and workers' compensation coverage may leave a disabled employee short of the protection they require. Many employer-offered plans are part of a suite of coverage and may not pay to the levels an employee needs to meet their expenses. You can choose to elect supplementary coverage on your own through a private insurance company. This is especially important for self-employed individuals and small business owners who may not claim workers' compensation for themselves.

As noted above, you may qualify for disability benefits through the Social Security Administration. Social Security Disability Insurance and Supplemental Security Insurance (SSI) provide benefits to insured individuals and their families. Being insured means you worked long (and recently) enough and contributed through Social Security taxes on your earnings. This means you don't actually purchase coverage through the SSA the same way you would through a private insurance company. You must apply online, by phone, in person, or by mail to begin receiving benefits, which are capped. Changes are made each year by the agency.

Types of Disability Income (DI) Insurance

Disability income insurance comes in two different types: Short- and long-term disability coverage. We've noted some of the basic components of each below.

Short-Term Disability Income Insurance

Short-term disability provides employees with coverage for time spent away from work for a short period of time. Wage insurance covers events, such as an illness, accident, or injury, where the employee intends to return to work after a few weeks, months, or a year. Most STD policies have a waiting period of zero to 14 days before benefits kick in. Benefits may only be paid for a maximum of two years.

Long-Term Disability Income Insurance

As the name implies, long-term disability insurance covers individuals who may experience more lengthy or lifelong events. Employer plans normally work in conjunction with STD plans. This means that individuals begin receiving STD benefits before any long-term benefits kick in. Put simply, long-term benefits begin after any short-term benefits are fully paid out.

The waiting period for LTD benefits can range anywhere between a few weeks to several months. The maximum benefit goes beyond STD coverage, from a few years to the rest of the insured individual's life.

The Cost of Disability Income (DI) Insurance

The final premium for disability income insurance varies and is based on a number of factors. Policy premiums generally range between 1% and 3% of your gross income. Insurance underwriters also consider age during the underwriting process. The minimum age for applicants is 18 while the maximum tends to be 60. Unlike life insurance, DI insurance rates for women are higher per unit of coverage than those for male applicants.

Insurers have historically paid more and higher dollar amounts for claims filed by women. This includes those filed during an earlier period of their lives. This may be attributed to pregnancy, childbirth, and higher rates of depression and autoimmune disorders. Smokers can also expect to pay as much as 25% more for the same protection as non-smokers because of the higher incidence of smoking-related illnesses.

When determining premiums, providers often place applicants into career and income classifications. The basis of these classifications is on the carrier’s claim experience for these job categories and incomes. The classification with the lowest risk pays less.