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What is Disability Insurance?
Disability insurance is a type of insurance that will provide income in the event a worker is unable to report to work based on the opinion of their physician. These policies typically cover off-the job accidents, sicknesses & maternity leave.
Short term disability insurance policies offer a worker a portion of their salary if they are unable to work for a short period- typically three to twelve months (sometimes up to 24 months).
Long term disability insurance offers a worker a portion of their salary if they are unable to work for a longer period- typically a period of over 24 months, usually until age 65.
Both short term and long term disability policies have a period that a person must be disabled for before that individual is able to start receiving disability benefits. That period of time is called an elimination period. If a person becomes disabled, they must wait until the elimination period is over before they start receiving benefits. If they are able to work before the elimination period is over, the person will not receive a benefit.
The Social Security Administration also provides disability insurance. Employees who've paid the Federal Insurance Contributions Act (FICA) tax for a certain amount of time, are eligible to receive the Social Security disability income insurance if they meet the strict requirements of disability under the OASDI program. This plan does not kick in until after someone is disabled for more than 12 months.
In states like NJ, NY, CA, HI & RI workers pay into a state disability fund, from which they can file a claim in the even of a disability. Please note that these benefits are often limited and not enough to provide an adequate cushion while recovering.
Disability insurance comes in many forms and can be obtained through a wide range of providers for a wide range of prices. The price of a disability insurance policy will be dependent upon the length of the elimination period, the benefit period (how long a person is able to receive the disability benefit), the monthly income benefit provided and how strict the definition of disability is under the policy.
Each policy can have its own definition of what qualifies as "disabled," so it is important to understand these rules before buying a policy. The two most common definitions are "own occupation," where a person is considered disabled if they are no longer able to perform the occupation they had prior to becoming disabled, and "any occupation," where a person is considered disabled if they are unable to perform any job at all. Obviously, the "any occupation" definition is more strict. All else equal, the policy with the more strict definition of disability will be the cheaper policy because there is less of a chance of an insurer having to pay benefits under a stricter policy.
