What Does Disability Insurance Cover?

Ken Latus is a vice president of Insurance Solutions at Northwestern Mutual.

Most people don’t think about being unable to work because of their health. But it’s more common than you might think. It’s a real concern because most of us couldn’t weather a few weeks without our paychecks coming in. And if an injury or illness disrupts your ability to work, your expenses would probably go up, not down.

Fortunately, disability insurance exists for this very reason. If you become disabled and can’t work at all or as much as you used to, this type of insurance will pay a monthly benefit to replace a portion of your lost income. In addition to paying the mortgage and credit card bills, the money can also help keep you on track for your financial goals.

But not every illness or injury necessarily qualifies for coverage. So, what does disability insurance cover? To answer that, let’s start with the basics.

What is disability insurance?

Broadly speaking, there are two primary types of disability insurance: short and long term. Short-term disability insurance is designed to pay a short-term benefit—typically for the first few months of a disability that prevents you from working. Long-term disability insurance provides coverage when a sickness or injury prevents you from working for more than several months, years or even for the rest of your career.

Most people receive group disability coverage through work, but you can also purchase your own disability insurance policy, as many employer plans cover only a portion of your regular salary. This portion is usually up to 60 percent and doesn’t include bonuses or commissions. Keep in mind that benefits that you get through an employer plan are taxable, which means your post-disability income may be lower than anticipated.

There’s typically a waiting period (also known as an “elimination period”), which is the time you must wait before you’re eligible to begin receiving benefits.

• For a short-term policy, the waiting period might not apply or might last a few weeks.
• For long-term disability, the waiting period is typically 60 to 90 days but could be shorter or longer depending on your policy.

The waiting period isn’t necessarily continuous. Let’s say you have a policy with a 60-day waiting period, and you’re out of work for three weeks for a qualifying reason. Then you recover and return to work full time. Your overall waiting period is reduced by those three weeks. So, if you qualify again later, your waiting period is 60 days minus 21 days, which is 39 days.

The other key phrase to know is the benefit period, the amount of time your policy will pay a benefit. Advisors typically recommend—and clients usually choose—to maximize their protection with the longest coverage period available. This is because the cost difference between shorter and longer benefit periods is not significant.

What does short-term disability insurance cover?

Generally, short-term disability insurance will provide income if you can’t work due to illness, injury or recovering from child birth. If one of those things keeps you from working anywhere from a few weeks up to as long as a year, you’ll lean on short-term disability. It’ll usually provide income on a monthly basis after your claim is accepted.

While you can get short-term disability insurance on your own, these plans are frequently offered through an employer. (Keep in mind that if your short-term disability plan is through work, your employer may require you to use all your available sick days before your disability benefit kicks in. The benefit you get is taxed as income.)

What conditions are typically covered by short-term disability policies?

Short-term disability insurance can cover a wide range of injuries or health issues. In many cases, policies are used for health reasons. This can include some of the conditions that may eventually result in a long-term disability (we get into these below). But it can also include many other short-term conditions—for example, recovering from childbirth, recovery from surgery or even an illness that causes you to miss work for several weeks or more.

What can short-term disability insurance be used to pay for?

One of the great things about disability insurance is that there’s no restriction on what you can use the money to pay for. Just like your paycheck, the money is yours. Disability insurance is ultimately designed to replace income, so most people use it like their paycheck—to cover basic living expenses like rent or mortgage, utilities, medical bills and food as well as to maintain their lifestyle and avoid accumulating debt.

What does long-term disability insurance cover?

If an illness or injury keeps you out of work until your short-term disability benefit expires, long-term disability can kick in. That’s why the elimination period for long-term disability insurance is longer, typically 90 days. Long-term policies typically cover you for as long as your disability lasts or up to the point that you would have retired.

With some policies, you need to meet the waiting period only once. For example, if you have cancer and are able to go back to work after being on disability and then later have to go back on disability for the same cancer, your benefits may kick in immediately the second time.

It’s also possible to collect a partial benefit due to lost time on the job, the inability to do key duties or a loss of earnings resulting from the disability. Let’s say you’re still able to work two to three days a week but not a full five days. You might be able to collect some of your benefit for the time you can’t work.

A policy you buy for yourself protects you as you change jobs over the years. Even if you change occupations, this policy follows you throughout your career. That’s important because in today’s work world, most of us eventually switch employers and even occupations.

What conditions are typically covered by long-term disability policies?

While many people believe that accidents are the primary reason for long-term disability claims, most claims actually stem from common conditions such as these:

• Musculoskeletal issues (e.g., bone, muscle and joint problems resulting from sports and orthopedic injuries)
• Pregnancy complications
• Cancer
• Mental disorders and substance abuse

Insurance companies set their own rules about what their policies cover. The coverage varies from company to company, so it’s important to comparison shop to see what’s covered. For example, complications from cosmetic surgery could be excluded.

What can long-term disability insurance be used to pay for?

Just like short-term disability insurance, a long-term disability policy benefit is money that you can use for whatever you need. Since it’s designed to replace your income, it’s frequently used to cover expenses like rent or mortgage, utilities, medical bills and food and to put toward future goals like retirement. You may have longer-term medical expenses, making your cost of living higher than it was while you were working. There aren’t any limits on what you can do with the money.money.

For example, the money could help you deal with extra costs, such as these:

• Medications not covered by insurance or requiring high copays
• Over-the-counter medical supplies (pain relievers, allergy meds, etc.)
• Medical equipment and assistive devices (mobility scooters, grab bars for showers, etc.)
• Unexpected doctor visits and hospital stays
• Transportation for medical appointments
• Physical therapy, occupational therapy and other rehabilitation services

What does disability insurance not cover?

It’s important to be honest and thorough on your policy application. Health conditions that you fully disclose on the application are covered—unless the company informs you that a certain condition is specifically excluded.

While disability insurance covers a wide range of conditions, your policy may not always pay benefits. The specifics vary from one company to another. These can include a disability or loss that results from (or is caused by or contributed to by) one of the following:

• Being on active duty in the military or an act or incident of war, declared or undeclared
• The suspension, revocation or surrender of professional or occupational license or certificate
• The commission of (or attempt to commit) a felony
• Incarceration

One thing to keep in mind is that living abroad could affect your benefits. For example, some policies require you to be in the U.S. to get more than six months of disability benefits.

How disability insurance becomes a key component of your financial plan

Disability insurance is a crucial component of a financial plan because it safeguards your ability to continue contributing toward your goals, even if you need to miss work. That means it’s important to make sure your total disability insurance coverage is enough to meet your current and future needs.

Your Northwestern Mutual financial advisor can help you fit all your life ambitions into a comprehensive financial plan that helps grow your wealth and fully protects your ability to build wealth—no matter what the future holds.

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. Disability insurance policies contain exclusions and limitations that could affect individual coverage.

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).