Disability Insurance

Disability insurance replaces a portion of your wages if you are sick or injured.  In the US, where workers’ compensation insurance covers workplace illnesses and injuries, disability usually covers only non-occupational illnesses and injuries.

Types of Disability Insurance

Many employers offer wage replacement in a number of components.

Sick Time or Paid Time-Off

Many employers provide sick time or paid time off benefits that pay you 100% of your wages when you are sick. There is often a limit on how many days of sick time you can take. More recently, vacation dates are included in the limit and the total is called “Paid Time-Off.”

Short-Term Disability Insurance

After a stated waiting period called an elimination period, short-term disability insurance will replace some or all of your wages.  I have seen short-term disability plans that pay between two-thirds and 100% of wages (excluding bonus) for between 13 and 26 weeks. I have never had an employer charge me for short-term disability insurance, but imagine some employers might do so.  Some governments outside the US, including Canada, offer programs similar to short-term disability. If your employer requires that you pay some or all of the premium for a short-term disability program, I suggest you research the benefits provided under any government program in your decision-making process.

Basic Long-Term Disability Insurance

After you have exhausted your short-term disability benefits, you may be eligible for long-term disability benefits if offered by your employer.  The basic long-term disability plans I have seen have paid between 50% of salary to two-thirds of the sum of salary and target bonus. Some long-term disability plans provide benefits for only a limited number of years while others will provide benefits until your normal retirement age.  In all cases, benefits stop, of course, if you recover and are able to return to work. I’ve had employers fully fund basic long-term disability and others that required that I share a portion of its cost. If you pay some or all of the premium for long-term disability insurance, the corresponding portion of any benefits you receive are not subject to income taxes.

Supplemental Long-Term Disability Insurance

Some employers give you the option to increase the percentage of your income that is replaced by long-term disability at your expense.

How to Decide

The decision whether to purchase any optional coverage depends on two key aspects of your financial situation. Are you able to support yourself and your family if you are ill or injured for a long time? Does the cost of the disability insurance fits in your budget?

At one (pretty unlikely) extreme, you don’t need to buy additional coverage because you have enough savings for retirement, any children’s education and even more or you could maintain your current lifestyle on your savings or your spouse’s income.  At the other extreme, you might find it difficult to afford disability insurance. In that case, you probably are also in the greatest need of it as one missed paycheck could be devastating financially. As such, the decision to purchase disability insurance is a balance between your need for the coverage in case you can’t work, your likelihood of having an accident or becoming serious ill and your ability to pay the premium.

5 Replies to “Disability Insurance”

  1. Hi there I am so happy I found your weblog, I really found you by error, while I was looking on Askjeeve for something else, Anyways I am here now and
    would just like to say many thanks for a tremendous
    post and a all round enjoyable blog (I also love the theme/design), I don’t have time to look over it all at the minute but I have bookmarked it and also added in your RSS feeds, so when I have time I
    will be back to read much more, Please do
    keep up the great job.

    1. I’m so glad you found us and like what you see. We hope you’ll come back and check out our existing and new posts. Be sure to comment if you have any thoughts, suggestions of comments on the content of any of the posts.

Leave a Reply

Your email address will not be published. Required fields are marked *