Is disability the same as Social Security?
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The ability to work and earn an income is something many people take for granted – but perhaps shouldn’t: the Social Security Administration estimates one in four 20-year-olds will experience a disability for 90 days or more before they reach age 67.1 That’s why the government provides Social Security Disability Insurance (SSDI), which is paid for by Social Security taxes.
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Like other forms of disability insurance – also known as disability income insurance – it can give you income to live on if you become disabled due to injury or illness. But there’s a lot of confusion about SSDI and other kinds of disability benefits. This article can help by answering key questions:
What are disability benefits?
How does SSDI compare to other types of disability insurance?
How can I get an individually-owned (individual) disability insurance plan?
Understanding disability benefits
Disability benefits are designed to provide financial assistance to people who are unable to work due to a disability. There are two main types of disability benefits: Social Security Disability Insurance (SSDI) and Long-Term Disability (LTD) insurance. SSDI is a federal program administered by the Social Security Administration (SSA), while LTD insurance is typically provided by private insurance companies:
To be eligible for SSDI benefits, a person must have worked and paid Social Security taxes for a certain number of years, depending on their age at the time of disability. SSDI benefits are paid monthly and are based on the individual’s past earnings record.
LTD insurance is provided by private insurance companies and is designed to replace a portion of an individual’s income if a covered disability leaves them unable to work. LTD benefits are usually paid monthly and are based on a percentage of the person’s pre-disability income.
All disability insurance policies — whether government-sponsored, like SSDI, or individual coverage from an insurance company like Guardian — share certain features. Looking at these five key items can help you better understand disability insurance and compare your options:
Premium: The monthly or annual amount you (or your employer) pay for the policy.
Waiting period: Also called an elimination period, it’s the amount of time after you are disabled until you can start receiving benefits.
Definition of total disability: Every disability policy has a specific definition of what it takes to qualify for total disability benefits. Generally speaking, there are two types of definitions:
An own-occupation definition means you qualify for benefits if a disability prevents you from working in your specialty or field.
An any-occupation definition means you only qualify for disability benefits if you can’t do any work at all.
Benefit: The amount of money you get each month while you are too sick or hurt to work.
Benefit period: The length of time you can receive benefits.
What SSDI covers, and how it works
SSDI is a government-sponsored disability insurance program that is included in your Social Security benefits, so the premiums are paid for by a portion of your Social Security taxes. The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. If you are self-employed, you pay the entire 12.4%.
Paying Social Security taxes doesn’t automatically qualify you for coverage. You also need to have earned a sufficient number of Social Security work credits, which are based on your total yearly wages or self-employment income. You can only earn up to four credits each year, so it takes a long time to become eligible for SSDI benefits. Generally speaking, you need 40 credits, 20 of which were earned in the last 10 years before you become disabled. (However, younger workers may qualify with fewer credits.)
There’s a five-month elimination period before you can start receiving benefits, which is comparable to many individual long term disability (LTD) plans. The waiting period for benefits also means that SSDI may not provide protection for shorter-term disabilities that keep you out of work for a few weeks or months. That coverage can be provided by short term disability insurance, which is also called STD (see below).
The Social Security Administration (SSA) has a strict any-occupation definition of disability that covers a specific and limited set of severe medical conditions listed in the SSA’s Blue Book. That means that SSDI only pays benefits for long-lasting or permanent medical issues that make you incapable of doing any work of any kind. If you’re a teacher, a plumber, or a brain surgeon, it doesn’t matter if a disability prevents you from working in your field – you will not qualify for SSDI benefits as long as you are physically able to hold any job, no matter how unskilled or low-paying.
The process of getting for SSDI benefits is notably stringent. The initial application requires extensive documentation and can take months to complete – and about 2/3 of these claims are rejected.2 To be eligible, you must meet the strict criteria, including a documented disability that prevents any work. While the initial decision can be appealed, the process can stretch out for years; but you may receive retroactive benefits for up to 12 months if the disability can be documented.
If and when benefits are eventually approved, the amount paid based is on your past earnings record and you start receiving payments once the elimination period is over. The average monthly benefit is $1,538, 2 and the benefit period lasts until age 65 (unless your disability resolves itself earlier), at which point you should qualify for Social Security retirement benefits.
Does SSDI provide enough protection?
Compared to other kinds of disability insurance, SSDI has a generous benefit period. However, due to the strict “any-occupation” definition of disability, you won’t qualify for benefits unless you suffer a catastrophic disability. That can be a problem for professionals and tradespeople who have spent years getting educational degrees and certifications that allow them to earn high wages: it could force them to accept any kind of job or forego income entirely. And even if you do qualify for SSDI, the benefit amount of just over $1,500 may not be enough for most people to live on. That’s why experts say you shouldn’t rely on SSDI alone for long term disability income protection.
How SSDI compares to other types of disability coverage
Short term disability insurance
This coverage is also called STD, and as the name suggests, it is for temporary disabilities not covered by SSDI or long term disability insurance (LTD). Short term disability plans are most often provided by employers as a low- or no-cost group benefit to all employees with premiums typically paid in whole or in part by the employer. Compared to SSDI or long-term disability plans, the elimination period is much shorter – typically two weeks. While STD payments don’t replace all of your wages, the benefit usually equals 60%-80% of your income. However, those payments only last for a short period of time: the benefit period is typically 3-6 months or until you can get back to work.
As for the definition of disability, any injury or medical condition that renders you physically unable to do your job will usually be covered. The expectation in a short term plan is that you will go back to your current job once your condition gets better, so you don’t typically have to worry about “own-occupation” or “any-occupation” definitions of disability. However, some issues, such as mental illness or pregnancy, may or may not be covered, depending on the plan.
STD benefits don’t come automatically – like other kinds of disability benefits, you have to file a claim. The insurance company will need to see medical records or other evidence that you have a disabling condition. If you have coverage through work, your first step should be to contact your HR department, and they will typically help you through the process. But it’s important to remember that even with the most generous plan, STD benefits almost never last for more than a year. For longer-lasting disability protection, you need a long-term plan.
Individual long-term disability insurance
Also called LTD, long term disability benefits offer income replacement for individuals who cannot work due to the same kinds of long-lasting disabilities covered by SSDI – but it may be considered easier to qualify for. Also, the benefit amount can be much more generous, depending on the policy and circumstances. Many financial professionals consider LTD to be a crucial financial safety net. So why don’t more people get an individual long-term disability plan? The most common deterrent is cost. You can expect to pay anywhere from 1% to 3% of your annual income for a comprehensive long term disability plan.3 However, it’s important to note that the premium cost is lower than the Social Security self-employed tax rate of 12.4%.
Individual long term disability insurance coverage is generally considered to be more customizable than SSDI, and many plan features can be modified to help lower premium costs. For example, the waiting period can be longer or shorter than SSDI depending on the specific policy: a longer period will tend to lower premiums, and a shorter period will raise them.
One of the advantages of getting a private LTD plan has to do with the amount of income you receive and the relative ease of qualifying for benefits. In a properly designed long term disability plan, the benefit amount should replace about 60%-80% of your after-tax income. Since benefit levels affect premium cost, a higher benefit could make the policy be unaffordable, leading you to let the coverage lapse; a lower benefit could leave you struggling to make ends meet.
When you apply for an individual LTD policy, you can choose between an own-occupation definition of disability or an any-occupation definition. Depending on who you are and what you do, either type of policy can be beneficial. For example, a permanent foot injury might keep a railroad conductor from walking easily and performing his or her regular occupation; with a little retraining, that person might be able to perform many kinds of desk jobs – even within the same organization – for similar pay. An individual long term disability insurance policy with an any-occupation definition of disability can help provide protection for such a person – and while it would only protect them if they suffered a more severe disability, they might get more income than they would with SSDI.
However, that level of protection may not be enough for many professionals and independent business owners. A surgeon who loses part of a finger in a car accident might never again be able to perform surgery. A trial attorney whose vocal cords are damaged by throat cancer might not be able to argue a case in court or perform other substantial duties. In both situations – and countless others – a professional’s earning potential and lifestyle can be severely impacted by disabilities that make them unable to perform the things they do best, even if they are still physically able to do other work. That’s why they should consider long term disability insurance with an own-occupation definition of disability. While these policies can be more expensive than any-occupation plans, insurance companies offer different forms of own-occupation coverage to help tailor benefits more cost-effectively to your needs. For example, Guardian offers a number of options under 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, income 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.
The benefit period provides another means of controlling premium costs. An individual long term disability policy can have a benefit period as short as two years – or it can go all the way to retirement (or until you recover from being disabled). Of course, the longer the benefit period, the more expensive the policy.
Key Differences Between Long Term Disability and SSDI
While both LTD and SSDI provide financial assistance to individuals with disabilities, there are key differences between the two programs. Here are some of the main differences:
Eligibility: SSDI is a federal program that requires individuals to have worked and paid Social Security taxes for a certain number of years, while LTD insurance is typically provided by private insurance companies and requires individuals to have a policy in place.
Benefit Amount: SSDI benefits are based on an individual’s past earnings record, while LTD benefits are usually based on a percentage of the individual’s pre-disability income; and the amount can be much higher than SSDI, depending on the policy.
Duration of Benefits: SSDI benefits are typically paid until the individual reaches retirement age, while LTD benefits are usually paid for a specified period of time, such as 2-5 years, or until the individual reaches retirement age.
Taxation: SSDI benefits are subject to federal income tax, while LTD benefits may be tax-free if the premiums were paid with after-tax dollars.
Claim process: The claim process (also known as the application process) for SSDI benefits is typically more complex and time-consuming than the claim process for LTD benefits.
It’s worth noting that individuals may be eligible for both LTD and SSDI benefits, and may be able to collect both types of benefits simultaneously. However, depending on the terms of the policy, the amount of LTD benefits may be reduced (or “offset”) by the amount of SSDI benefits received.
How to get an individual disability policy
Short term disability coverage is often included as part of an employee benefits package. If it’s available, you should make sure you’re signed up: You could obtain lower group coverage rates, and your employer may pay for a portion of the cost (or even cover STD premiums 100%). However, many employers don’t offer individual long term disability plans – and even if your employer does, the features and benefits may be limited.
If you are concerned that SSDI would not support your lifestyle, speak with a financial professional to get the comprehensive long term disability policy you need (or fill in the gaps of your workplace LTD with a supplemental plan). Make sure that professional is familiar with the specifics of buying an individual disability policy – If you don’t know one, a Guardian financial professional can help you. Give your financial professional as much information as you can about your financial situation and concerns so that he or she can start looking into disability insurance coverage options for you.
Discuss different coverage scenarios: What happens if you have an illness that takes you out of the workforce for a few years? What if you have a physical impairment that limits your productivity? The more you explore, the more you’ll realize the value of individual long term disability insurance, especially compared to the limited protection offered by Social Security disability benefits.