Understanding Disability Insurance: The Coverage Most Families Overlook

Let me start with a statistic that surprises most people: One in four 20-year-olds will experience a disability before reaching retirement age.

Read that again. One in four.

Yet when I ask new clients about their insurance coverage, almost everyone can tell me about their life insurance. Very few can tell me about their disability insurance—if they have it at all.

This is a dangerous gap.

Your ability to earn an income is likely your most valuable asset. If you're 30 years old and earn $75,000 per year, you'll earn over $3 million during your career (before accounting for raises). Protecting this income stream is just as important—arguably more important—than protecting your life.

Let me explain what disability insurance is, why you need it, and how to make sure you have adequate coverage.

What Is Disability Insurance?

Disability insurance replaces a portion of your income if you become unable to work due to illness or injury.

Unlike workers' compensation (which only covers work-related injuries), disability insurance covers you whether your disability is caused by an accident, illness, or injury—regardless of where or how it happens.

Short-Term vs. Long-Term Disability Insurance

**Short-Term Disability (STD):** - Covers disabilities lasting a few weeks to several months - Typically replaces 60-70% of your income - Benefit period: Usually 3-6 months - Common uses: Recovery from surgery, childbirth, short-term illness

**Long-Term Disability (LTD):** - Covers disabilities lasting months to years (or until retirement age) - Typically replaces 50-70% of your income - Benefit period: 2 years, 5 years, to age 65, or lifetime (varies by policy) - Elimination period: Usually 90-180 days (how long you wait before benefits begin)

Most people need both, but if you have to choose one, long-term disability is the priority. A short-term disability is inconvenient. A long-term disability can be financially catastrophic.

Why You Probably Don't Have Enough Coverage

Many people assume they're covered because they have group disability insurance through their employer. And maybe they are. But probably not.

The Problems with Group Coverage Alone

**Problem #1: Limited Coverage Amount** Most group policies replace only 60% of your base salary, up to a maximum cap (often $5,000-$10,000 per month).

If you earn $120,000 per year ($10,000/month), 60% coverage is $6,000/month. But can you really live on 60% of your income? What about the other 40%?

Plus, if your group benefits are paid by your employer, the benefits are taxable. So that $6,000/month might only be $4,500 after taxes. Now you're living on 45% of your previous income.

**Problem #2: Benefits End When Employment Ends** Group disability coverage is tied to your job. If you leave (voluntarily or not), you lose the coverage.

Some policies are portable, meaning you can take them with you, but the premiums often increase significantly.

**Problem #3: Weak Definition of Disability** Many group policies use an "any occupation" definition after two years. This means:

- For the first two years, you're considered disabled if you can't perform your own occupation - After two years, you're only considered disabled if you can't perform ANY occupation you're reasonably suited for based on education and experience

This is a huge problem. Imagine you're a surgeon who develops hand tremors. You can no longer perform surgery. But you could potentially teach or consult. Under an "any occupation" definition, your benefits could end after two years—even though you can't do your actual job.

**Problem #4: No Cost-of-Living Adjustment** Most group policies provide a flat benefit that doesn't increase with inflation. If you become disabled at 35 and receive $5,000/month for the next 30 years, that $5,000 will buy significantly less over time.

What to Look for in a Good Disability Insurance Policy

If you need to supplement your group coverage—or you're buying an individual policy—here are the key features that matter:

1. "Own Occupation" Definition of Disability

This is the gold standard. An "own occupation" policy pays benefits if you can't perform the duties of your specific occupation, even if you could work in a different field.

**Example:** You're a dentist. You develop severe carpal tunnel syndrome and can't practice dentistry. But you could potentially teach or work in insurance sales. An "own occupation" policy would still pay you because you can't do your own occupation.

Look for a policy that maintains this definition for the entire benefit period, not just the first two years.

2. Non-Cancelable and Guaranteed Renewable

**Non-cancelable:** The insurance company can't cancel your coverage or increase your premiums as long as you pay your premiums on time.

**Guaranteed renewable:** The insurance company must renew your policy, but they can increase premiums for your entire class of policyholders (not just you individually).

Ideally, you want a policy that's both non-cancelable AND guaranteed renewable. This locks in your rates and ensures coverage can't be taken away.

3. Adequate Benefit Amount

You can typically insure 60-70% of your gross income. The benefit should cover your essential expenses and allow you to maintain your savings patterns if possible.

**How to calculate your need:** 1. Start with monthly take-home pay 2. Subtract what you'd save on commuting, work clothes, etc. if disabled 3. Add any additional costs (medical expenses, home modifications, etc.) 4. Subtract any other disability income (Social Security Disability, spouse's income if applicable) 5. The difference is what you need from disability insurance

Most people should aim to replace at least 60% of gross income through a combination of group and individual coverage.

4. Benefit Period to Age 65 or Beyond

The benefit period is how long the policy will pay if you remain disabled.

Common options: - 2 years - 5 years - To age 65 - Lifetime

The longer the benefit period, the more expensive the policy. But a disability that lasts until retirement age is the biggest financial risk.

If you become disabled at 40 with a 5-year benefit period, what happens at 45 when benefits end? You still can't work, but now you have no income.

For most people, a benefit period to age 65 or 67 makes sense. Some high-income professionals opt for lifetime benefits.

5. 90-Day Elimination Period (Usually)

The elimination period is like a deductible—how long you must be disabled before benefits begin.

Common elimination periods: - 30 days - 60 days - 90 days - 180 days

A longer elimination period significantly reduces premiums. Most people choose 90 days, using emergency savings or short-term disability to bridge the gap.

If you have a robust emergency fund (6-12 months of expenses), consider a 180-day elimination period to save money.

6. Residual or Partial Disability Rider

This pays a partial benefit if you can work part-time or in a reduced capacity.

**Example:** You're a financial advisor who has a stroke. You recover enough to work 20 hours per week instead of 40. A residual disability rider would pay you a percentage of your benefit based on your income loss.

This is extremely valuable because many disabilities aren't all-or-nothing. This rider helps you transition back to work gradually without losing all benefits.

7. Cost-of-Living Adjustment (COLA) Rider

Once you're receiving benefits, this rider increases your benefit annually based on inflation (typically 3% per year or tied to CPI).

If you become disabled young, this rider is crucial. Without it, your purchasing power erodes significantly over time.

8. Future Increase Option

This rider allows you to purchase additional coverage in the future without undergoing medical underwriting again.

**Why this matters:** You buy coverage at 30 earning $60,000. By 40, you're earning $100,000. The future increase option lets you increase your coverage to match your higher income, even if you've developed health issues.

What About Social Security Disability Insurance?

You've paid into Social Security your entire working life. Doesn't that cover you?

In theory, yes. In practice... it's complicated.

The Reality of Social Security Disability

**It's very hard to qualify:** Social Security uses an extremely strict definition of disability. You must be unable to perform ANY substantial gainful activity due to a condition expected to last at least 12 months or result in death.

If you can perform any job—even if it's completely different from your career and pays a fraction of what you earned—you likely won't qualify.

**Approval rates are low:** Only about 30-40% of initial applications are approved. Many people have to appeal multiple times, which can take years.

**Benefits are modest:** The average Social Security disability benefit is about $1,500-$1,700 per month. If you earned a good income, this won't come close to replacing it.

**There's a long waiting period:** You must be disabled for five months before benefits begin.

**Bottom line:** Don't count on Social Security disability as your primary protection. If you qualify, great—it supplements your private insurance. But it shouldn't be your main plan.

How Much Does Disability Insurance Cost?

Cost varies based on: - Your age - Your occupation (riskier jobs cost more) - Your income - Your health - The benefit amount, benefit period, and elimination period - The riders you include

Typical Costs

For a healthy 35-year-old professional:

**Example 1: Basic Coverage** - $5,000/month benefit - 90-day elimination period - Benefit to age 65 - Own occupation for 2 years, then any occupation - Cost: $80-120/month

**Example 2: Comprehensive Coverage** - $5,000/month benefit - 90-day elimination period - Benefit to age 65 - Own occupation to age 65 - COLA rider - Residual disability rider - Cost: $150-250/month

Yes, it's an expense. But compare it to the cost of NOT having coverage.

If you earn $100,000 per year and become disabled at 40, you could lose $2.5 million in earnings over the next 25 years. Paying $2,000 per year to protect against that risk is money well spent.

Special Considerations for Different Situations

For Self-Employed Individuals

You definitely need individual disability insurance—you don't have group coverage.

Consider: - A shorter elimination period (60 days instead of 90) since you don't have short-term disability - Business overhead expense insurance to cover business operating costs if you're disabled - Key person disability insurance if you have business partners

For Stay-at-Home Parents

Don't overlook disability insurance for a non-working spouse. If the stay-at-home parent becomes disabled, the family may need to pay for: - Childcare - House cleaning - Meal preparation - Transportation for kids

This could easily cost $2,000-3,000 per month or more.

For High-Income Earners

Individual disability insurance typically caps at $15,000-$20,000 per month in benefits.

If you earn $500,000+ per year, you may need: - Supplemental disability insurance - Excess disability insurance (coverage above standard limits) - Structured business solutions if you're a business owner

Work with a specialized insurance broker who understands high-income earner needs.

Common Questions

**Q: What if I have a pre-existing condition?** A: You can often still get coverage, but the pre-existing condition may be excluded or rated (higher premiums). Some conditions (well-controlled diabetes, for example) may have no impact after a few years of stability.

**Q: Does disability insurance cover mental health conditions?** A: Most policies cover mental health disabilities, but often with limitations (e.g., 24-month maximum benefit for mental/nervous disorders unless you're hospitalized).

**Q: Can I have both group and individual coverage?** A: Yes, and this is often the best approach. The group coverage provides a base, and individual coverage fills the gaps.

**Q: What about short-term savings or an emergency fund instead?** A: An emergency fund is essential, but it won't support you through a multi-year disability. You need both.

Action Steps

**1. Review your current coverage** Check what disability insurance you have through work. Look at the benefit amount, definition of disability, and benefit period.

**2. Calculate your coverage gap** What would you need to maintain your lifestyle if disabled? Subtract existing coverage. The difference is your gap.

**3. Get quotes for individual coverage** Contact an independent insurance broker who specializes in disability insurance (not a captive agent who only represents one company).

**4. Apply while you're healthy** Don't wait until you have health issues. Disability insurance is medically underwritten—the healthier you are, the better your rates and approval odds.

**5. Review coverage every 3-5 years** As your income increases, make sure your coverage keeps pace.

The Bottom Line

Most families spend more time choosing a streaming service than they do thinking about disability insurance.

Yet disability insurance protects your most valuable asset: your ability to earn an income.

You insure your house, your car, your life. Why wouldn't you insure the income that pays for all of it?

You might never need your disability insurance. And I hope you don't.

But if you do need it, it could be the difference between your family maintaining their lifestyle or facing financial devastation.

Ready to Protect Your Income?

We help families evaluate their disability insurance needs and find coverage that provides comprehensive protection without overpaying.

[Schedule a free discovery call](/book) to review your disability insurance coverage.

Michelle Schee is a CERTIFIED FINANCIAL PLANNER™ professional serving families in Texas. This article is for informational purposes only and should not be considered personalized financial advice.