How Disability Insurance Works

The critical component to nearly every financial plan is income. Each month, your income helps you pay for the things that are important to you today while also funding future goals like home upgrades, your kids’ college education and retirement. Without that income, your financial plan can quickly fall apart.

That’s why disability income insurance is so critical to any financial plan—because it helps to replace lost income. Here, we’ll help you understand what disability insurance is, how it works and why it’s a critical part of your financial plan.

What is disability insurance?

Life doesn’t always go the way we plan. Unexpected changes in your health, due to illness or accident, could result in you not being able to work or earn an income—which is your most valuable asset. In that event, disability insurance can help replace your income to help cover you financially.

What qualifies as a disability?

Generally speaking, a disability would be any condition that limits your ability to perform your regular work; however, each policy will have its own definition of what qualifies as a disability. Your benefit also may depend on the type of disability. For example, your policy may have different rules for an own-occupation disability (when you’re unable to perform your job) vs. an any-occupation disability (when you’re unable to perform any job).

Types of disability insurance

There are many different types of coverage available, mostly based on how long you’d like your coverage to last. The most common types include:

Long-term disability insurance

Long-term disability insurance is intended to provide coverage for a long period of time, usually anywhere from a few months to a few years (or even permanently). In many cases, employer-issued long-term disability insurance policies only replace 50 to 60 percent of your income, so it’s a good idea to carry additional long-term disability insurance beyond what your employer offers.

With long-term disability insurance, there is a waiting period (usually around 90 days) between the time a qualifying injury or illness occurs and when you’d receive payment. So, many people also choose to purchase additional coverage—like short-term disability insurance—to cover the gap.

Short-term disability insurance

Short-term disability insurance is typically available after a shorter waiting period—only a few days or a few weeks. Depending on your plan, short-term disability insurance could cover between 50 to 100 percent of your income. As you probably guessed, short-term disability insurance lasts for a shorter amount of time than long-term disability insurance, depending on your policy, so it may only cover about three to six months of income. A common use of short-term disability is to cover income during a maternity leave.

Supplemental disability insurance

In many situations, the payout on your employer-offered long-term group disability insurance plan may not be enough to cover your current expenses. In that event, you can adjust your spending, or you could look at purchasing some supplemental long term individual disability insurance to cover your current lifestyle. Supplemental disability insurance would include any added coverage you purchase in addition to what is offered by an employer.

Social security disability insurance

If you’ve been paying into Social Security and you’re unable to work for a year or more because of a disability, you and certain family members may also be eligible for Social Security disability benefits. To qualify, you’d need to meet the Social Security Administration’s definition of a disability and provide certain medical information about your condition.

How does disability insurance work?

While the specific details and processes of a policy will vary by policy, here’s how disability insurance generally works.

You determine how much coverage you want

It’s difficult to predict an unknown event, but there are a few things you should think about when deciding how much disability insurance to carry. You’ll want to think about what your income is now and what it could be in the future, what expenses you’ll want it to cover and how long you want your money to last.

With some disability insurance policies, you will pay the same premium every year for the duration of the policy; these are known as “level” premiums. Another type of policy is known as “annually renewable.” With an annually renewable policy, your premium payments will start out lower than they would with a level policy, but they will increase each year as you age.

You purchase a policy that covers you for a set period of time

Depending on the policy, disability insurance typically covers you for a certain period of time or until you reach a certain age — usually 65, 67 or 70. As long as you pay your premiums, your disability benefit is guaranteed should you have a qualifying disability. If you still need coverage once you reach your maximum age, you may be able to extend your policy.

When you get disability insurance through work, your coverage will typically end if you leave your job. When you get a private policy, your coverage can remain in effect no matter what happens with your situation at work.

In the event you need to, contact your agency and collect your benefit

If you have a disability and need to collect your benefit, you would make a claim. Once that claim is approved, the company would pay your benefit to you (typically monthly) for as long as you continue to be disabled, up to a certain point known as your “maximum benefit period.” With some policies, the benefit lasts for a certain amount of time, like two, five or ten years. But with many policies, the benefit lasts until you reach age 65 or age 70.

When to review your disability insurance

While it’s a good idea to check in regularly (usually once a year) with your financial advisor, in many cases you may not need to make changes to your disability insurance policy. But there are a few times when you may want to revisit your insurance coverage. 

As your income Increases

As you grow in your career, there’s a chance your income will increase, sometimes substantially. As it does, you may want to review your policy to make sure your disability insurance coverage is maximized, meaning you may add an additional monthly benefit.

When there are changes at work

Over time, your situation at work may change. Your employer may change the disability coverage offered through the company. Also, you may decide to go part time, switch jobs or start your own business. Any of these might affect the amount of disability insurance that you need moving forward.

When there are changes at home

How much you need to support your family can change as your family grows and as children become independent. Whenever you experience family milestones, it could be a good time to check in and see whether those changes impact your monthly financial needs—and the coverage you’ll want.

Disability insurance is critical to your financial plan

Disability insurance is only one piece of the puzzle when it comes to financial planning. Your retirement goals, long-term savings goals and monthly budgeting can all impact how much coverage you’ll want. A Northwestern Mutual financial advisor can help you take a look at how all the pieces fit together and recommend a strategy that protects your ability to achieve all you want in life—even if something unexpected happens.

To be used with form ICC16.TT.DI.IIB.(0916), ICC16.TT.DI.FIB.(0916), ICC16.TT.DI.CAT.(0916), ICC16.TT.NCDI.(0916), ICC16.TT.GRDI.(0916), ICC16.TT.DI.PDB.(0916), ICC16.TT.DI.PDBO.(0916) or state equivalent. Not all contracts and optional benefits are available in all states. Disability insurance policies contain some features and benefits that may not be available in all states. The ability to perform the substantial and material duties of your occupation is only one of the factors that determine eligibility for disability benefits. These policies also contain exclusions, limitations and reduction-of-benefits provisions. Eligibility for disability income insurance, additional policy benefits, and qualification for benefits, is determined on a case-by-case basis. For costs and complete details of coverage, contact your Northwestern Mutual Financial Representative. 
 
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life insurance, disability insurance, annuities, and life insurance with long-term care benefits)

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