As its name suggests, disability insurance is an insurance product that provides income in the event that a policyholder is prevented from working and earning an income due to a disability.
Individuals can obtain disability insurance from the government through the Social Security System. They can also purchase disability insurance from private insurers.
Disability insurance – along with other types of insurance planning – can better prepare you and your family for an unexpected loss of income.
Oftentimes, insurance products will protect against a specific loss, such as when a property and casualty insurance plan reimburses the policyholder for the value of stolen property. However, in the case of disability insurance, this compensation relates to the lost income caused by a disability.
For example, if a worker earned $50,000 per year prior to becoming disabled, and if their disability prevents them from continuing to work, their disability insurance would compensate them for a portion of their lost income provided that they qualify. In this sense, disability insurance essentially covers the opportunity cost of the now-disabled worker.
In practice, there are many conditions that a policyholder must satisfy in order to receive these payments. This is particularly true in regard to the U.S. Social Security System. To qualify for government-sponsored disability insurance, applicants must prove that their disability is so severe that it prevents them from engaging in any type of meaningful work at all.
By contrast, some private plans only require the applicant to demonstrate that they can no longer continue in the same line of work that they were previously engaged in. The Social Security System also requires applicants to demonstrate that their disability is expected to last for at least 12 months or that it is expected to result in death.
As with all types of insurance, disability insurance plans will carry more expensive premiums if their terms and conditions are more favorable to the policyholder. Conversely, plans with less generous terms will typically carry lower insurance premiums. Some of the key features that affect insurance premiums in disability insurance plans include the length of the elimination period, which is the length of time that the applicant must wait after becoming disabled before they can begin receiving benefits; the benefit period, which is how long those benefits continue to be paid; and how strict the definition of “disability” is under the policy.