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Understanding Disability Insurance

Cathie Ericson9-minute read
April 11, 2021

Think disability insurance isn’t for you because you’re young and healthy? Think again. According to the Council for Disability Awareness, at least one-quarter of those who are currently age 20 will at some point be out of work for at least 1 year prior to reaching retirement age, due to a disabling condition. That means it’s something every working adult should take seriously. Here’s what you need to know about it.

What Is Disability Insurance?

Disability insurance is sometimes called “paycheck protection” for a very important reason – it protects your income should you have a long- or short-term disability. And these can cover a wide range of conditions. The most prevalent reasons people need short-term disability insurance range from pregnancy to mental health issues, to common injuries like sprains or factures.

Long-term disability most often comes into play for musculoskeletal disorders (which affect the back and spine, knees, hips, shoulders, etc.), along with a medical condition like cancer. Long-term can also include the common short-term issues that become long-term as they extend past the initial period, like complications from pregnancy, mental health and injuries.

Given how common these conditions sound, you’re probably thinking you should look into the possibility of disability coverage. The good news is that every working American is afforded some through Social Security, but those benefits could be limited. You can also talk to your HR department about a disability insurance policy your company might offer or call around to talk to a local insurance company about their programs and your eligibility.

Types Of Disability Benefit Programs

Wondering how you might be covered? Here are the types of programs available.

Social Security Disability Insurance (SSDI)

If you become disabled after you have worked long enough to accrue Social Security benefits, you would qualify for Social Security disability insurance. As you might know, Social Security taxes are automatically deducted from your paycheck – or if you’re self-employed, you make the payments yourself to the IRS as part of your annual tax accounting. The Social Security website explains more about how you know if you are eligible; in summary, it’s whether you have worked 40 quarters. While you might commonly think of these payments as providing a safety net to be there for retirement, the Social Security Administration (SSA) also funds people who are disabled. To find out if you would qualify and for how much, visit the SSA website, where you can find the checklist for application.

Supplemental Security Income (SSI)

While SSDI is based on your work history, a separate program, Supplemental Security Income (SSI), is based solely on your need. That means it also gives benefits to disabled adults and children with limited income and resources. While administered by the SSA, it is funded through general tax revenues, rather than Social Security contributions. To find out if you or a loved one are eligible, visit this screening tool by the Social Security Administration, and then this supplemental security income application page to find out how to apply.

VA Disability Compensation

This is a separate program that provides a tax-free monthly benefit to veterans who got sick or injured during the course of military service or whose service made an existing medical condition worse. More information on eligibility is available here, but the benefits often include both monthly financial support and healthcare. Your qualified dependents are also likely included, too.

Common reasons for benefit claims include chronic back pain, breathing issues, hearing loss, range of motion issues, cancers from exposure to toxic chemicals and many mental health conditions, including anxiety and depression. 

Employer Coverage

As part of your benefits package, many employers offer short-term disability and long-term disability, as well as life insurance. It’s important to read your benefits summary carefully to find out how much these policies cost and how you apply and qualify for them. But given the prevalence of disability issues, it can be a wise way to provide financial peace of mind and paycheck protection for you and your family.

Private Disability Insurance Policies

An insurance company also will offer separate policies. If you don’t feel that the monthly benefit provided in an employer-sponsored package is adequate for your family, you may choose to get supplemental insurance. Remember that employer-sponsored coverage will end when you leave your job in most cases, while a private policy is independent of any working situation.

Benefits Of Disability Insurance

We’ve mentioned the phrase “paycheck protection” many times, and that is exactly what it is. It can step in to cover your bills and provide for your family if you are hurt or have a medical condition that otherwise makes it impossible to work. You’ll want to examine your policy if it’s separate from Social Security to determine exactly how much it covers, but it is designed to cover a portion of your paycheck.

In most cases, short-term disability refers to a condition that extends about 3 – 6 months, while long-term disability would kick in after that and can last up to the rest of your working life (again, depending on your policy).

While any type of disability insurance is intended to replace a portion of your income for everyday bills for you and your family, some might also have a cost of living adjustment (COLA) benefit that adjusts each year to protect your monthly disability payments against rising inflation.

It’s important to talk to your provider about what your policy offers as well as any additional benefits you’d like to add as “riders.”

How To Qualify For Disability Insurance

The Social Security Administration offers detailed information on what qualifies you for disability. But an important thing to know is that the Social Security disability income limits are an average of $1,260 a month, which means you won’t qualify if you are earning more than that.

And if you are not working, it must be because your condition prevents you from doing basic work, whether that entails standing, sitting, walking or lifting; or mental work such as remembering basic facts and functions. Its website offers a detailed list of potential impairments.

Here are more details on how you would go about filing for disability insurance. (Remember that your employer-sponsored or private insurance might have different conditions or steps.)

Determine If You’re Eligible

As mentioned above, the SSA offers a list of conditions that qualify you for disability insurance. This is the criteria under which the SSA will evaluate your application.

Apply For Benefits

If you believe you qualify based on a medical condition, are 18 or over and are not currently receiving benefits on your own Social Security record, you can apply online.

Gather Your Documentation

The application will ask for information you should have at the ready. These include:

  • Your Social Security Number, service information if you were in the military and information on your birthplace if it was not the United States
  • Your W-2 tax form, or if you were self-employed, your federal income tax return
  • Banking information so you can have your monthly benefit sent via direct deposit
  • Details on any workers comp claim you have previously filed
  • Contact information for someone who can verify your claim
  • Details on your condition, including dates of treatment and tests, medications you are taking, pertinent medical records and contact information for your providers
  • A list of up to five jobs and your dates of employment for the past 15 years

Complete Your Application And Submit.

The good news is you don’t have to fill it out all in one sitting; if you take a break, the SSA will offer a re-entry number that will take you back to where you were. Once you’ve filled out the application to the best of your ability, you can submit it.

Wait For More Information From The SSA.

They will investigate your claim and get back to you to let you know if there is information they need and then provide an approval or denial.

FAQs About Disability Benefits

You likely still have questions regarding disability benefits. Here are some frequently asked questions and answers, bearing in mind that you should check with your insurer or human resources department to get information that is specific to your situation.

When Will You Start Receiving Disability Benefits After Getting Approved?

Once you’ve applied for disability benefits, as described above, you’ll be waiting for an approval. Once approved, the first benefit will be paid for the sixth full month after the date that the SSA determines the disability began. In other words, say your disability began on May 15, 2019. Your first benefit would be paid for the month of November 2019 as the sixth full month of disability. Those 6 months in the middle (from your injury to when you begin to receive benefits payments) are called the “elimination” period.

What’s The Maximum Amount You Can Receive In Disability Benefits?

Disability insurance, much like your Social Security payment, are based on your average lifetime earnings. The Social Security Administration benefits calculator will help you determine your benefit.

Is Disability Income Taxable?

Your benefits may be taxable if you or your combined household has a certain level of income. To find out, add half of your disability payment to the other sources of income you have. You’ll pay taxes if it’s above $25,000 as a single filer or $32,000 if filing jointly. There are also 13 states that may tax your disability payment so make sure you find out if and what you owe – Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia collect state income tax in some situations.

Note that your disability benefits will qualify toward the Earned Income Tax Credit (EIC or EITC) if you receive your disability retirement benefits before you reach the minimum retirement age, but after that age, they do not count as earned income. The EITC is a refundable tax credit for low- or moderate-income families.

How Do Disability Income Limits Work?

Some people may still work while receiving disability benefits. However your earning limit is $1,310 a month in 2021, which rises to $2,190 for those who are blind. Note that there is no limit on household income, such as from a spouse or assets, that affects your payment.

How Do Disability Insurance Premiums Work?

Just like other insurance policies, you will pay insurance premiums if purchasing disability coverage through a private company. Your premium will be based on factors such as your age, health history, the benefit amount, how long it will be paid and the elimination period (how long you have to wait before being paid). Make sure to read your benefits summary carefully to purchase the plan that best suits your needs.

What’s The Difference Between Disability Income Insurance And Workers’ Compensation?

A key difference between disability income insurance and workers’ compensation is what type of disability is covered. Workers’ compensation will only apply if you sustain injury or become ill from work. Disability income insurance applies for both work-related and non-work-related disabilities.

If you are receiving supplemental disability insurance from another source, such as a private policy, that will not affect your SSA benefits. However, workers’ comp benefits, which are those paid because of an injury or illness incurred on the job, can reduce your Social Security benefit. You’ll want to confirm for your individual situation, but a rule of thumb is that the total amount of these benefits can’t exceed 80% of your average current earnings before you became disabled.

What Healthcare Options Are There For Those With Disabilities?

Disability insurance is different from healthcare coverage, in that it gives you a monthly benefit but doesn’t cover your cost of care. Visit healthcare.gov to consult the ACA Marketplace where you can find out if there’s a plan that will work for you or look into Medicare and Medicaid to find out if you will be covered under those government programs. Should you choose to seek private insurance, it is currently a law that insurers may not reject you for “pre-existing” conditions, which is what your disability would be. The site also provides options to help you make a choice on a plan so you are covered while you are waiting to find out if your disability application has been approved.

What Happens If Your Disability Application Gets Rejected?

Social Security denied your request for disability insurance. But take heart; you have recourse. Your first step should be to read the explanation letter they send with each denial. It could be that you need to send more documentation or that you should add have other supporting information, such as additional medical evidence or testimonials from your doctor.

Can You Apply For Disability Insurance If You Aren’t Currently Disabled?

This is where private insurance can come in handy. You’re buying it as a precaution against becoming disabled. Whereas you apply for Social Security disability benefits once a disability happens, private disability insurance or employer-sponsored plans are ones you purchase before you become disabled. Make sure to research available plans and see whether they are right for you and your family.

The Bottom Line

Knowing more about disability insurance is important to protect yourself before your finances are at risk. When investigating whether Social Security benefit or supplemental private coverage is the right choice for you and your family, understanding your options can help to protect your financial future.

Want to know more about financial wellness moves you should make today? Check out more Personal Finances content on Rocket HQSM.

Cathie Ericson

Cathie Ericson writes about personal finance, real estate, small business, education, retail/ecommerce and other topics for a host of brands and websites. Her work has been featured on major media websites, including U.S. News & World Report, Forbes, Business Insider, The Oregonian, Industry Dive, Boston Globe, CNBC, MSN.com, Realtor.com and Yahoo Finance, among many others. Find her @CathieEricson.com.