In Focus – SCCCU Blog

Someone at work mentioned disability insurance, and now you’re wondering, “Do I actually need that?” The answer might be yes. The truth is, disability insurance isn’t as complicated as it sounds. The name can be misleading, making it seem like it’s only for rare or extreme situations. In reality, disability insurance is simply income protection. It helps keep money coming in if you get hurt or sick and can’t work for a period of time.

What is Disability Insurance?

Imagine your paycheck stopped next week due to a car accident, a cancer diagnosis, or back problems that require extended leave. This would mean no salary coming in and no hourly wages. But your rent or mortgage payment is still due. Your groceries, car payments, and electric bill? Those are still happening. Disability insurance can step in and help you replace a portion of your income (usually 50–70%), so if something prevents you from working, your financial life doesn’t fall apart while you’re healing.

Is Disability Insurance Only for People with "Dangerous" Jobs? 

No. In fact, that's one of the most common misconceptions about disability insurance. You don’t need to be a construction worker or firefighter to need disability insurance. That’s because most long-term disabilities are caused by illness, not injury.

So, disability insurance is worth considering, no matter what kind of job you have, if you:

• Rely on your paycheck to cover your bills
• Have others (dependents) who rely on your income (e.g., children, partner, older parents, etc.)
• Don’t have enough in savings to go several months or years without income

On the other hand, if you’re financially independent or retired, you don’t need disability coverage, because you’re not relying on income from a job. The same goes if you’re part of a couple where both partners earn enough individually to support the family.

And if you have a substantial emergency fund (more than a year's worth of expenses saved up), you may be able to self-insure and skip disability insurance. However, most people are not quite there yet.

Types of Disability Insurance

There are two main types of Disability Insurance:

• Short-term disability insurance usually kicks in quickly (within two weeks) and lasts three to six months. It’s meant for recovering from things like surgery, childbirth, or temporary illness.
• Long-term disability insurance kicks in after a more extended waiting period (usually 90 days) and can last for years, or even until retirement age, depending on the policy.

How Much Does Disability Insurance Cost?

Not as much as you might think. A general rule of thumb is that long-term disability insurance costs 1% to 3% of your annual salary. So, if you make $50,000 a year, you might pay $500 to $1,500 per year, or less than $125 a month.

The price you’ll pay depends on your age, job, health history, and how much of your income you want to replace. It also depends on where you buy it. Individual policies are generally more expensive than group policies. And remember, disability benefits are meant to cover your needs, not luxuries, so most policies won’t replace 100% of your income. Why? They want you to have an incentive to return to work.

Where Can You Purchase Disability Insurance?

Start with your job. Many employers offer short- or long-term disability insurance as part of your benefits. Sometimes it's free, sometimes you pay for it, or sometimes they’ll cover or subsidize part of the cost. Review your benefits guide during open enrollment and carefully consider your options.

If your employer doesn’t offer disability coverage (or if you're self-employed), you can buy an individual policy through an insurance company. Be sure to shop around before purchasing a policy. Compare how long the benefits last, how much income they cover, and what the “elimination period” is (or the length of time you have to be out of work before benefits begin).

Disability insurance policies vary widely in how they define “disabled.” Some policies, called “own occupation” coverage, will pay out if you can’t do your current job. However, "any occupation" coverage will only pay if you can't do any job at all. For example, with "any occupation" coverage, if you are a surgeon who can no longer operate but can still perform several other tasks, you won’t receive payment. "Own occupation" coverage is more expensive than "any occupation" coverage for this reason.

Additionally, if you’re paying for the policy with after-tax dollars (such as from your paycheck), then the benefits you receive are typically tax-free. But if your employer pays for the policy with pre-tax dollars, you might have to pay taxes on any disability income you get. Just be sure to read the fine print!

The Bottom Line

No one loves paying for something they hope they’ll never need. But, in reality, we do it all the time. We purchase homeowners' insurance, auto insurance, and health insurance, and would never consider going without them. If you rely on your paycheck, disability insurance can be one of the smartest forms of financial protection you’ll ever buy. Think of it as insurance for your most valuable asset: your ability to earn a living.