The Basics of Disability Insurance: Part 1

Disability insurance is a vital component of financial planning and risk management, but it’s often misunderstood and overlooked. While Social Security disability benefits provide a form of disability insurance, it’s essential to understand that there are many types of personally owned disability insurance available. 

Consider this: the Social Security Administration estimates that one in four 20-year-olds will experience a disability event before age 67. If you insure your car, your house, or your life, then insuring against the risk of disability should also be a financial priority. 

What is disability insurance?

Simply put, it can provide a monthly benefit to the insured in the event of a disability, injury, or sickness. This benefit can help cover living expenses and other financial obligations while the insured cannot work. There are two basic types of disability insurance: short-term and long-term disability. 

  • Short-term disability insurance provides income replacement to those unable to work due to a covered illness or injury. The benefit is usually paid out for a limited period, anywhere from a few weeks to a few months. Some of the circumstances that may be covered include pregnancy complications, work or non-work-related injuries, illnesses such as heart attack, cancer, mental health disorders, and critical surgeries. 
  • Long-term disability insurance provides income replacement just like short-term disability policies. However, the benefit usually doesn’t start for a few months, and it can last for a few years or to a specified age, such as age 65. It generally covers some of the same scenarios as short-term coverage, but a key difference is that a long-term disability policy typically will only pay out if the disability or injury experienced is anticipated to remain a permanent condition. 

Policy Variations

It is crucial to understand the distinctions between various disability policy options. There are many different versions, but the most common policies have language describing the scenarios in which they pay, how benefits are paid, if benefits increase over time, what conditions are excluded, etc. Some key considerations of selecting the right type of coverage include, but are not limited to: 

  1. Cost: Disability insurance can be expensive, and premiums can vary depending on factors such as age, health, occupation, and the level of coverage. 
  2. Coverage limitations: Disability insurance policies may limit the types of illnesses or injuries covered, the amount of benefits payable, and the length of time that benefits will be paid. 
  3. Definition of disability: The definition of disability can vary depending on the policy, and it’s essential to understand the specific criteria that must be met to qualify for benefits. 
  4. Waiting periods: Disability insurance policies typically have waiting periods before benefits begin, ranging from a few weeks to several months. 
  5. Other sources of coverage: It’s important to consider other sources of disability coverage, such as workers’ compensation or Social Security disability benefits, when evaluating the need for disability insurance. 

Planning for the possibility of a disability is a topic that nobody likes to dwell on. However, it is essential to securing your financial well-being and finding peace of mind. Do not underestimate the significance of this aspect in your overall financial plan, especially if you’re actively accumulating assets and earning income. Take the initiative to consult with a trusted financial advisor who can guide you in developing the right plan tailored to your specific needs. 



Luke Brooks, CFP®, ChFC®, RICP®, is an Advisor at The Welch Group, LLC, specializing in providing fee-only investment management and financial advice to families of various backgrounds. Luke is a graduate of Columbia International University, is passionate about helping others achieve their financial dreams, and is a Certified Financial Planner®.



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