What Is Disability Insurance, and Do I Need It?

Someone at work mentioned disability insurance, and now you’re wondering: “Do I actually need that?” Maybe. Because here’s the truth: Disability insurance sounds more complicated than it is. And the name doesn’t help — it makes you think it’s only for rare, dramatic events. But at its core, disability insurance is really just income protection. It’s simply a way to keep money coming in if you get hurt or sick and can’t work for a while.

So, what exactly is disability insurance?

Imagine your paycheck stopped next week due to a car accident, a cancer diagnosis or back problems that require extended leave. This would mean no salary coming in, no hourly wages.  But your rent? It’s still due. Your groceries, car payments, electric bill? Those are still happening. Disability insurance can step in and help you replace a portion of your income — usually 50–70% — so that if something prevents you from working, your financial life doesn’t fall apart while you’re healing.

It doesn’t cover 100% of your income (we’ll get to why in a minute), but it can give you enough of a safety net to cover the essentials. 

Is it just for people with “dangerous” jobs?

Nope. That’s one of the biggest myths. You don’t need to be a construction worker or firefighter to need disability insurance. That’s because most long-term disabilities are caused by illness, not injury. 

So, disability insurance is worth considering, no matter what kind of job you have, if you: 

• Rely on your paycheck to cover your bills
• Have others (dependents) who rely on your income — like kids or a partner or older parents
• Don’t have enough in savings to go several months or years without income

Who probably doesn’t need it?

If you’re financially independent or retired, you don’t need disability coverage, because you’re not relying on income from a job. Same goes if you’re part of a couple where both partners earn enough individually to support the family.  

And if you have a huge emergency fund — we’re talking a year or more of expenses saved up — you might be able to self-insure and skip disability insurance. But most people just aren’t quite there yet.

What types of disability insurance are there?

There are two main types:

• Short-term disability insurance usually kicks in quickly (within 1–2 weeks) and lasts three to six months. It’s meant for recovering from things like surgery, childbirth, or temporary illness.
• Long-term disability insurance kicks in after a longer waiting period (usually 90 days) and can last for years — or even until retirement age, depending on the policy.
  

How much does it cost?

Not as much as you might think. A general rule of thumb is that long-term disability insurance costs 1% to 3% of your annual salary. So, if you make $50,000 a year, you might pay $500 to $1,500 per year, or less than $125 a month.

The price you’ll pay depends on your age, job, health history, and how much of your income you want to replace. It also depends on where you buy it.  Individual policies are pricier than group policies (more on that in a moment). And remember, disability benefits are meant to cover your needs, not luxuries — so most policies won’t replace 100% of your income.  Why? They want you to have an incentive to return to work.

Where do you get disability insurance? 

Start with your job. Many employers offer short- or long-term disability insurance as part of your benefits. Sometimes it’s free, sometimes you pay for it, or sometimes they’ll cover or subsidize part of the cost. Check into it during open enrollment, and read over your benefits guide closely. 

If your employer doesn’t offer disability coverage — or if you’re self-employed — you can buy an individual policy through an insurance company. If you belong to a credit union, they may offer discounted policies or partnerships with insurers. It’s worth asking.

Pro Tip: If you go the individual route, make sure to shop around. Compare how long the benefits last, how much income it covers, and what the “elimination period” is.  That’s the length of time you have to be out of work before benefits begin. 

Anything else I should know?

Disability insurance policies vary widely in how they define “disabled.” Some policies — called “own occupation” coverage — will pay out if you can’t do your current job. Others — called “any occupation” coverage —  only pay if you can’t do any job at all.  This is called “any occupation” coverage. Big difference.  With any occupation, if you are a surgeon who can no longer operate but you can do a number of other things, you won’t get paid.  Own occupation coverage is pricier than any occupation for this reason.

Also, consider this: if you’re paying for the policy with after-tax dollars (like from your paycheck), then the benefits you receive are usually tax-free. But if your employer pays for the policy with pre-tax dollars, you might have to pay taxes on any disability income you get. Again — always read the fine print. 

The Bottom Line

No, disability insurance isn’t exciting. No one loves paying for something they hope they’ll never need. But, in reality, we do it all the time.  We buy homeowners insurance and auto insurance and health insurance and would never consider going without.  If you rely on your paycheck — and most of us do — this policy can be one of the smartest forms of financial protection you’ll ever buy.

Think of it as insurance for your most valuable asset: your ability to earn a living.