The different kinds of disability insurance policies and how they work

There are two basic types of disability insurance coverage: Short-term and long-term. Both provide a benefit that replaces a portion of your earnings, ranging from 50% to 80%. That money can be used to pay for living expenses, repaying loans, or even put into savings. Despite those similarities, the two kinds of policies are bought differently and work somewhat differently, in large part because short-term needs differ from long-term needs.

Most disability is temporary, keeping a person out of the workplace for under a year. Short term disability insurance (STD for short) is designed to replace income for these shorter periods of recuperation from injury or illness. STD is typically obtained as part of a group insurance plan through the workplace, either as a mandatory (employer-paid) or voluntary (employee-paid) benefit. These plans typically pay a benefit for three to six months.

Other types of disabilities are more severe, longer-lasting, and even permanent. Long term disability insurance (LTD for short) is for these situations, with a benefit designed to last for many years – even through retirement if needed. Unlike STD, which most people get through work, LTD is often purchased as an individual insurance policy, especially by business owners and higher-income professionals who are concerned about what might happen to their family’s lifestyle if they were no longer able to practice their profession. 

The five basic features of a disability policy

No one wants surprises when the time comes to make a disability claim. That’s why every disability policy, whether short-term or long-term, defines five items that clearly spell out when you can qualify for benefits, how much you can get, for how long, and under what circumstances: 

  • Premium: The monthly amount you (or your employer) pays to keep coverage in effect. 
  • Benefit: The amount you get each month you are unable to work, which is typically a percentage of your actual salary. In an individual LTD policy, the benefit usually isn’t taxed (unless paid for with pre-tax dollars); in a group STD plan paid for by your employer, the benefit will be taxable.
  • Benefit period: The maximum length of time you can receive benefits. For short term disability, it’s almost never more than one year; for LTD, it can be as little as two years or go all the way to retirement.
  • Waiting period: Also called an elimination period, it’s the amount of time after you are disabled until you can start receiving benefits. It’s often two weeks for short term disability insurance, and six months or more for long term disability insurance.
  • Definition of total disability: Every disability policy has a specific definition of what it means to be totally disabled in order to qualify for benefits. This “what’s covered?” question is the focus of the next section.

What a disability insurance policy covers: it all depends on the definition of disability

Own-occupation or any occupation?

STD plans have a relatively simple definition of what it means to be totally disabled: if you are unable to perform the substantial duties of your present occupation because of illness or injury, you typically qualify for coverage. Since short term disability insurance benefits only last a few months, the assumption is you’ll go back to your regular occupation when you’ve recovered. 

However, long term disability policies have to address another possibility: what if an injury or illness makes you unable to perform your own occupation, but won’t stop you from practicing any occupation? That’s why some long-term disability policies have an own-occupation definition of disability, and others have an any-occupation definition. Depending on who you are and what you do, either type of policy can be beneficial. Certain types of disability, such as a permanent foot injury, might keep you from doing parts of your job that require mobility. However, with a little retraining, you could perform many kinds of desk jobs – even within the same organization – for similar pay. If so, an LTD insurance policy with an any-occupation definition of disability may provide adequate protection. 

However, people with very specialized skillsets – physicians, dentists, lawyers, even independent business owners – usually need more comprehensive protection. To cite an obvious example, a surgeon who develops arthritis might lose the ability to perform surgery, severely impacting his or her earning potential – even though they are physically able to do many other kinds of work.

Long term disability insurance with an own-occupation definition of disability pays a benefit if you lose the ability to perform your regular occupation. Because these policies are more comprehensive, they also cost more than an any-occupation policy. So, insurance companies offer different forms of own-occupation coverage to tailor benefits more cost-effectively to your needs. For example, Guardian offers a number of variations on their own-occupation definition of disability:

True Own-Occupation

If you can’t work in your regular occupation but are willing and able to work in some other capacity, this definition means you can get your full benefit payment even while holding another kind of job. If the surgeon in the above scenario had disability insurance for physicians with this definition, he or she could take a teaching or consulting job and still receive replacement income for the entire benefit period.

Modified Own-Occupation

This definition pays a full benefit if you can’t work in your regular occupation and you are not gainfully employed in another capacity. Accordingly, the lawyer in the above scenario would receive benefits as long as he or she wasn’t earning income – but if they decided to start working as a legal consultant, benefits would stop.

Two-Year True Own-Occupation

This definition of disability offers a two-year period of True Own-Occupation. If you’re still disabled after two years, your coverage converts to a Modified Own-Occupation definition for the remainder of your benefit period. 

Two-Year Modified Own-Occupation

Another option is to simply have a Modified Own-Occupation definition for the first two years. If you’re still disabled after two years, your coverage converts to an Any-Occupation definition, meaning that due to sickness or injury, you’re unable to work in any occupation.

Total and partial disabilities

“Own-occupation” or “any-occupation” disability is one of the most important factors to consider when getting a long-term policy. However, in certain situations, a person’s disability – and immediate need for benefits – is beyond question. That’s why many disability policies have a presumptive disability feature that pays full benefits – without an elimination period – to a policyholder who loses sight in both eyes, hearing, speech, or the use of at least two limbs. Since the financial consequences of these kinds of disability can be especially severe, many long-term disability insurance policies also offer a catastrophic disability (CAT) rider as an optional feature to increase the amount of disability benefits. For example, Guardian’s Enhanced CAT provides up to 100% income replacement and adds a compound 3% cost-of-living adjustment.

Sometimes people can still work, but their disability has resulted in a partial loss of responsibilities, time on the job, and income. That’s why many LTD policies offer a partial disability feature which pays a reduced percentage of benefits if you become disabled in a way that limits your ability to work but doesn’t cause total disability. Some insurance companies (such as Guardian) also offer enhanced partial disability benefit riders to provide added income protection even if you are still working but only losing a percentage of your pre-disability earnings due to the disability.

Temporary and permanent disabilities

Some disabilities are total and permanent, but most are temporary. It may seem counterintuitive, but both short-term and long-term policies can provide protection for temporary and permanent disabilities. To explain why, let’s look at an example of each type of disability:

  • Using STD and LTD for a permanent disability - While STD policies aren’t designed to provide years of replacement income, they have a much shorter waiting period than most LTD plans – as little as two weeks, compared to six months or more for many long term disability plans. If you have a permanent disability, your STD plan can provide the income you need to live on from the time you become disabled until long term disability insurance benefits start. Having STD benefits can also help you lower the cost of long-term coverage, because the longer your LTD waiting period, the lower your premiums.
  • Using STD and LTD for a temporary disability - Some temporary disabilities get better in a matter of weeks or months while others may take a year or two to recover from. While long term disability insurance won’t typically pay benefits for the first six months or so, it can and will work in tandem with short term disability insurance to help maintain your lifestyle if an accident or severe medical issue (such as a stroke) keeps you out of work for a year or more. These insurance policies may also cover rehabilitation expenses as you recover, including therapy and care costs, as well as modifications to your home, car, or workplace to help you start working again. Some insurance companies may also provide coverage for retraining, for example, by paying for you to go back to school or earn certifications that will make you a more competitive job candidate.

Mental illness

Some disability insurance policies will have exclusions for certain mental illnesses, and if an applicant is in treatment for a condition such as depression or anxiety prior to taking out the policy, it will usually be treated as a pre-existing condition that is not eligible for coverage. Other policies may cover mental illness, but with reduced benefits or a shorter benefit period. Every disability provider sets its own rules, so it’s important to find out what they are before purchasing a policy.

Pregnancy benefits

While a healthy pregnancy isn’t the same as a disabling illness or injury, many short-term disability policies now offer maternal benefits. If so, you may qualify to receive 50-100% of your income, typically for six weeks after you give birth, or eight weeks if you have a C-section. A pregnancy with complications is another matter, because (depending on the issue) a complication can be more like an illness that would be covered under a standard plan – and the benefit period could well be longer. If a pregnancy complication results in a lasting disability – or worsens another condition, such as diabetes or multiple sclerosis that had previously been under control – you may well qualify for long term disability insurance benefits once the waiting period is over.

Other disability coverage benefits

Long term disability policies are highly customizable, and major carriers such as Guardian offer numerous riders to enhance benefits and increase protection. Popular riders include:

  • Student loan protection - Provides extra money to make student loan payments. It is particularly useful for early-career professionals such as doctors and lawyers who have invested heavily in their education. 3
  • Cost of living adjustment (COLA) 4 - This states the insurance company will increase your benefits while on claim to account for inflation.
  • Retirement contribution protection5 - Protects retirement savings by replacing the contributions you would have made to your defined contribution plan while totally disabled. Guardian’s Retirement Protection Plus rider also compensates you for matching contributions that would have come from your employer.

How to get a disability policy with the coverage you need

If you can get disability coverage as part of your employee benefits package (especially for STD), start there. You’ll enjoy lower group coverage rates, and your employer may pay for a portion of the premiums, or even cover STD premiums 100%. However, most employers don’t offer long term disability insurance plans – and even if your employer does, the coverage will likely be limited compared to an individual policy. 

Once you know how much disability coverage (if any) is available through work, it’s time to speak with a financial advisor or broker to get the comprehensive disability policy you need – or fill in the gaps with a supplemental plan. Make sure that professional is familiar with the specifics of buying individual long-term disability insurance – If you don’t know one, a Guardian financial advisor can help you. Tell your advisor as much as you can about your financial situation and concerns so that he or she can start looking into the plans and options that cover the things that are most important to you. 

Don’t put it off – the younger and healthier you are, the lower your disability premiums. And don’t get overwhelmed: It may seem like a lot to think about but working together, you and your advisor will be able to come up with the best disability insurance plan: a policy that is uniquely tailored to your protection needs.

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Frequently asked questions about disability insurance coverage

How much does disability insurance cost?

Expect to pay anywhere from 1% to 3% of your annual income for a comprehensive disability insurance plan.6 The actual premiums you pay will depend on the benefit amount, period, and the types of coverage features included in your policy. In addition, there will be an underwriting process (as with life insurance, you’ll be asked to take a medical exam) in which the insurance company assesses your age, lifestyle, and health, which will factor into your policy cost.

What is disability insurance used for?

The purpose of disability insurance is to protect and replace a portion of your income if you suffer a disabling injury or illness that keeps you from earning a living. 

What do disability insurance policies usually cover?

Depending on the type of policy and how it is customized, a disability policy can cover almost any temporary or permanent medical condition caused on the job or off that keeps a person from working.

If I have Social Security Disability Insurance, do I still need disability coverage?

Social Security Disability Insurance only covers total disability, is very hard to qualify for, and the average monthly benefit is just over $1,000. If that is not enough for your needs, you should consider other types of disability insurance coverage.

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1 Social Security Administration Fact Sheet, December 2019.

2 Integrated Benefits Institute, 2018 Health and Productivity Benchmarking, Long-Term Disability

3 The Rider provides coverage for period of 10 or 15 years from the Policy Date. When a qualifying total disability occurs, benefits are only payable during the remaining portion of the 10- or 15-year term that has not elapsed when the disability begins.

4 This benefit is not necessarily protection against increases in the cost of living.

5 Retirement Protection Plus is not a pension plan, qualified retirement plan or qualified individual retirement account or a substitute for one.

6 Council for Disability Awareness

Individual disability income products underwritten and issued by Berkshire Life Insurance Company of America (BLICOA), Pittsfield, MA. BLICOA is a wholly owned stock subsidiary of The Guardian Life Insurance Company of America (Guardian), New York, NY. Product provisions and availability may vary by state. Optional riders are available for an additional premium.

This publication is provided for informational purposes only and should not be considered tax or legal advice. Please contact your tax or legal advisor regarding the tax treatment of the policy and policy benefits and your particular set of facts and circumstances.

An individual’s eligibility for benefits is determined on a case-by- case basis, taking into consideration the factual circumstances presented as well as the terms and conditions of his/her policy(ies).

Guardian® is a registered trademark of The Guardian Life Insurance Company of America.

Some policy benefits and features are not available to all occupations.

2020-111295 EXT 20230228