What is Disability Insurance and Why Do You Need It?

Super Saving Tips aren’t only about saving money by clipping coupons or knowing when the best times of the year are to shop. They’re also tips or “words to the wise” about what you can do in advance about issues that can affect your life, which of course can affect your money. That’s why I am writing today about disability insurance.

What is disability insurance? If you don't have it, then it's time to consider it. I'll help you understand what it is and why you need it.

What is Disability Insurance?

You may think disability is unlikely to happen to you, but 56 million Americans, about 1 in 5, live with disabilities.  And for today’s 20-year-olds, more than 1 in 4 of them will become disabled at some point before reaching retirement age. If your disability leaves you unable to work, how will you provide for yourself (and your family)?

If you are temporarily or permanently unable to work, and that condition is not caused by your employment*, there are disability plans that can help replace some of your lost income. These disability insurance programs are broken down into several types.

*Work-related situations that cause you to be unable to work are covered under Workman’s Compensation laws.

Short-Term Disability Insurance

Short-term disability (STD) insurance covers a part of your income when you are unable to work from illness, injury or pregnancy. It can last for up to 6 months when you file (except in California where it can last up to 1 year). After that period, you would either return to work, become unemployed, or file for long term disability coverage.

Many people think that STD insurance programs are state run and mandatory. That’s not exactly true! If you believed that you’d be wrong 45 out of 50 times. Just 5 states have a mandated program, 45 states do not and you would need to have your very own private STD plan that you purchase to protect yourself.

States with a mandated STD coverage program are:

  • California
  • Hawaii
  • New Jersey
  • New York
  • Rhode Island

Long-Term Disability Insurance

Long-term disability (LTD) insurance ultimately is designed to aide you for longer periods of time when you are unable to work. It might actually be a bridge from your working time until you reach retirement age or age 65, but it is not designed to be a retirement plan in itself. It is meant for people who can’t work for a period of at least 1 year and may actually never be able to return to work.

Some disabled people, as you probably already know, apply and remain on disability income programs for many years. These programs help support people no matter how long a disability lasts as long as they remain eligible. That procedure is quite involved and is carefully monitored to prevent any abuses (although not always successfully unfortunately).

LTD coverage can be from a private insurance plan you buy (through your employer or independently) or from SSDI (Social Security Disability Income) or SSI (Supplemental Security Income). It is based on work history and a medical decision that you are unable to work.

The initials of two government programs are so similar that it’s easy to confuse them.

What is the difference between SSDI and SSI?

SSDI benefits can be paid to blind or disabled workers who are unable to work any gainful employment for a year or longer. Like Social Security retirement benefits, they can also be paid to their children, to their widows or widowers, and to adults who haven’t worked but have been disabled since childhood. Eligibility is based on medical disability and work history.

SSI, meanwhile, pays benefits to no- or low-income people who are 65 or older, to adults who are disabled (based on the same definition used by SSDI) or blind, and to children who are disabled or blind. The program is only for people who have very limited income and assets. Work history is not taken into account.

Another key difference is how the two programs are financed. SSDI is funded by the Social Security taxes paid by workers, employers, and self-employed people. SSI, on the other hand, is financed by general revenues that the Treasury Department collects to run the U.S. government.

So Why Do I Need Private Disability Insurance?

You may think that if SSDI and SSI are available, not to mention STD in certain states, that you don’t need private insurance. But government programs only provide a fraction of your previous income. In fact, at the beginning of 2015, Social Security paid an average monthly disability benefit of $1,165. That is barely enough to keep a beneficiary above the 2014 poverty level ($11,670 annually). Private insurance can be purchased for different percentages of replacement income, with the private insurer paying out the difference between your government benefit and the percentage insured.

SSDI was not ever meant to cover all of your working life income so many workers purchase LTD insurance that can help cover as much as two thirds of your regular income. It is an insurance item I fully recommend and isn’t expensive, but can mean a huge difference in your life if needed.

Also, private disability insurance can help when you become disabled and need disability income right away. Frankly, SSDI can take many months and sometimes even years to be approved and private coverage can really be a life saver for people. There are many details you need to research about disability insurance so you fully understand (percentage of income replaced, waiting periods, same occupation versus any occupation, exclusions, etc.), but keep in mind that if you become disabled, your income is never automatically covered 100%.

My Wife’s Story

Becoming disabled is something that you may never expect to happen to you or a loved one but you should be aware of the possibility and purchase private insurance through your employer (if available). My wife and I are very fortunate that she did just that. Suzanne developed rheumatoid arthritis in her 30’s and has been unable to work for several years now. Because of SSDI and that private coverage, she has been able to maintain an income and it has made a huge difference in our household. Not only does it help to replace some of her lost working income, but also to pay her increased medical bills. SSDI recipients are also eligible for Medicare, which helps significantly.

The bottom line is that government disability insurance programs are likely not enough coverage to protect you if you are unable to work. While you might have enough emergency funds to cover yourself through a short term disability, you’re unlikely to be able to finance a long term issue. If you don’t already have private LTD insurance, I highly recommend you look into it.

Do you have short-term and/or long-term disability insurance coverage? What would you do if suddenly you were unable to work and not covered under Workman’s Compensation? Do you know of anyone whose became disabled and didn’t have coverage? What would you do if it happened to you?


  1. You wife made a very good financial move. Fortunately, I have long-term disability insurance coverage in place which is termed permanent health insurance here in the UK.

    The short-term coverage is indeed a brilliant idea because the government provides a fraction of ones previous about £80 a week which is barely enough to cover basic necessities, which increases when once is unable to work

  2. At this point I’d probably self insure if left to my own devices. You do only need these programs until you can live without the income.. but I have employer STD and LTD. It’s not as secure since my employer may have issues or they let you go before the insurance kicks in, but given our current situation that’s an acceptable risk.

    1. It’s great to have a plan in place that seems like a good safety net. You obviously have thought about this and that is a good thing. Hopefully, others will think about it long before it becomes an issue in life. At least that’s what my intentions were when writing this. Thanks so much for commenting, FTF.

  3. Other than the LTD policy from work, no. I’ve been in the same job for over 20 years and like many long-term employees, I’d accumulated quite a stash of unused vacation/sick days, which, in some ways could have functioned as STD insurance, but the firm is now making us take them or lose them.

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