How does disability insurance work?
Disability insurance can provide you with an income when you’re too sick or injured to work. Generally, these disability insurance policies cover a portion of your monthly pre-disability income so that you can still provide for yourself and your family.
The cost of disability insurance depends on the amount of income you’re earning. Typically, you should expect to pay about 1%–3% of your annual salary to receive coverage. However, sometimes employers sponsor disability insurance policies, but keep in mind that employer-sponsored plans only last for the term of your employment. If an employer doesn’t offer disability insurance or you don’t like the available options, you can purchase an individual policy through an insurance company.
If you get sick or injured and are unable to work, your insurance policy won’t pay out disability benefits immediately. Rather, you’ll have to go through a waiting period, known as the “elimination period,” after filing a disability claim. The elimination period is established before you even sign up for your disability insurance policy. Generally, the longer the elimination period, the cheaper the policy’s going to be.
Once your policy starts paying out, the amount of time it lasts depends on something called the “benefit period.” In general, a policy’s benefit period can be as short as three months or, in some cases, benefits can stretch into retirement. The length of time you receive benefits also varies and depends on whether you purchase short-term or long-term disability insurance. We’ll discuss the differences between these two types of policies in more detail below.