Disability insurance: What it is and why you need it?

Disability insurance protects and replaces a portion of your lost income if you can't work due to a qualifying illness or injury. If, as the primary income earner, you have a life insurance policy to replace the income your family needs if you die, shouldn't you also have coverage to replace lost income and cover living expenses if you're disabled? That's precisely what disability insurance covers – and the risk of disability for a working-age person is much higher than the risk of death. It's also important to know that workers' compensation only pays a monthly benefit (and sometimes, medical bills) for medical issues caused at work. It's not a substitute for disability insurance.

Many people think that disability is primarily caused by caused by rare, catastrophic events – like a severe car accident. However, most long-term disability claims are caused by illness and medical issues.⁵ How would you replace your monthly income in the event of a permanent disability? Even a robust emergency fund isn't likely to be enough to support your family long-term.

Different kinds of disability insurance plans provide benefits for various lengths of time but don't typically provide income for life. Short-term disability policies last a year at most; long-term disability insurance can provide benefits for a set number of years (i.e., 2, 5, or 10 years) or until reaching retirement age, even if it's decades away.

All disability insurance policies are designed to help you avoid financial hardship by giving you money if you become disabled. But not all types of disability are the same. There are different types of policies you can get:

• Short-term disability insurance

Also called STD, this policy is for temporary disabilities. It is designed to replace 60-80 percent of your income for a short period: typically 3-6 months (and rarely more than a year), or until you get back to work.

• Long-term disability insurance

Also called LTD, this type of policy is designed to last for many years – through retirement age. If something happens and you can no longer work, it replaces 50-65 percent of your income for an individual policy.

• Social Security Disability Insurance

Also called SSDI, this coverage comes as part of your Social Security benefits. However, it is usually much more challenging to qualify for than a disability policy purchased individually or through work.

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