Your DI Field Guide: A Beginner’s Guide to Disability Insurance

You might ask why I’m writing an article about disability insurance. That sounds super boring and not applicable, right?!

I get it. I used to think the same way.

When I first saw disability insurance listed on a workplace benefits enrollment form, I skipped right over it because I believed I didn’t need it or that it was a scammy add-on. No one explained what it was, how it worked, or how the risk was applicable to me. I never asked myself, “What would I do if I couldn’t work?”

But here’s the thing: the risk is real and far more common than most people believe. A 25-year-old worker has about a 1 in 4 chance of becoming disabled before age 67, compared to about a 3% chance of dying. [1] Yet, disability insurance barely gets a mention in financial conversations.

Life insurance gets all the attention. It’s talked about constantly, marketed heavily, and bought by millions. Death is final and frightening, so it gets our attention. But losing the ability to work, even temporarily, can be just as financially devastating. In some ways, it’s worse: bills keep coming, your lifestyle doesn’t stop, and you may face new expenses on top of everything else.

This isn’t a sales pitch. I care about it because I finally connected with its importance. Personal finance needs good defense, and disability insurance is an underrated position in that lineup.

Two Types, One Goal: Replacing Your Paycheck

Disability insurance (DI) comes in two main flavors: short-term (STDI) and long-term (LTDI).

STDI kicks in quickly, often within a week or two of an illness or injury, and pays you a weekly benefit for a limited time, usually 3–6 months. It’s designed to cover temporary circumstances, like recovering from surgery, giving birth, or managing an illness that improves with treatment.

LTDI  starts after a waiting period. Ninety days is common, though it can be shorter or longer depending on your policy. Once benefits begin, they can continue for several years or even until you reach retirement age. LTDI exists for life-altering events: a cancer diagnosis, a severe injury, a neurological disorder, or any condition that prevents you from working for an extended period.

Both types of DI cover a percentage of your salary, typically 50-60%. No policies cover 100% because insurers want to incentivize you to get back to work if you can! STDI is more expensive pound-for-pound because you’re more likely to use it, but cost is also impacted by how you obtain coverage and the options you choose.

Group vs. Individual Policies

If you’re employed, your workplace might offer group disability coverage. This is the easiest entry point. Often, you don’t need a medical exam if you enroll when you’re first hired. The downside? The policy ends when your employment does, benefits may be capped, and the definition of “disability” gets more restrictive after a certain period.

Individual policies, on the other hand, stay with you no matter where you work. They’re medically underwritten, so you’ll go through an application and health screening, but in exchange, you get coverage often with stronger definitions of disability and options for additional protections. You may have guessed this, but individual policies are more expensive for all these reasons.

Understanding the Fine Print

Disability insurance policies aren’t all the same. The differences often come down to the fine print; features that can make a policy either just okay or robust. Let’s lay out the most common ones.

Disability Definition

Own Occupation (a.k.a “own occ”) is the most self-protective definition of disability. If you can’t perform the duties of your specific job, you qualify for benefits, even if you could technically do a different job. For example, a surgeon who injures their hands could receive benefits under an own occ policy, even if they could teach or consult in the medical field. The other end of the spectrum is an Any Occupation (a.k.a “any occ”) definition. With this type of policy, you have to prove you can’t perform any job you’re reasonably qualified for, which is a much higher hurdle to obtain or maintain benefits.

Renewability Options

Guaranteed renewable means the insurer must renew your policy as long as you pay the premium. They can’t cancel it because your health changes. But they can raise your premiums as the cost of insurance rises. Non-cancellable takes it further. The insurer can’t raise your premiums or change your benefits. These options protect you from losing coverage. Can you guess which option costs more?

Future Protection

Guaranteed Insurability can be considered a future purchase option, allowing you to increase your coverage in the future, without a new medical exam. This is especially valuable early in your career, when your income is likely to grow but your health could change unexpectedly.

Inflation Defense

If you go on claim, a Cost of Living Adjustment (COLA) option increases your benefit each year to keep pace with inflation. Without it, your fixed benefit could lose significant purchasing power during a long disability.

Bridging the Gap

Some policies coordinate with Social Security Disability (SSDI) and will pay a Supplemental Income (SIS) benefit while you wait for SSDI approval. If you qualify for SSDI, your private benefit is reduced or eliminated. If you are denied SSDI, you keep the full SIS benefit. This can be crucial for covering expenses in the often-long gap between filing an SSDI claim and getting a decision.

This menu of features sounds great! Why wouldn’t I want all of them? Here's the catch: the more bells and whistles, the more expensive the policy. The game is finding the right balance between cost and the level of protection you need and want.

Taxes! What Does Disability Have to Do with Taxes?!

Unlike life insurance proceeds, which are always tax-free, disability benefits can be taxable or tax-free depending on who pays the premium and how. Here’s how that works:

• Your employer pays premiums, and that premium is not included in your taxable income: Benefits are taxable.

• Your employer pays and includes the premium as “imputed” income on your paycheck: Benefits are tax-free.

• You pay premiums yourself: Benefits are generally tax-free.

This is one of those subtle details that greatly affect how much benefit you actually take home.

Sidebar: Imputed income is just money you’re taxed on, even though you don’t receive it in cash.

Deciding How Much You Need

Ultimately, this is about risk management. How much income could you replace from your own resources if you couldn’t work for six months? A year? Five years?

For short-term needs, an emergency fund can cover you. That’s the first defense to build and could be a replacement for short-term disability insurance. But long-term disability can be financially devastating without coverage, especially if you’re the sole breadwinner or both incomes in a two-person household are needed to make ends meet.

If you have enough wealth to comfortably weather a disability event, you might skip insurance, but I haven’t met any working-age clients in that situation. Once you stop working for good, though, you no longer need disability insurance because there’s no paycheck to protect.

When and How Do I Use It?

When a disabling event occurs, you’ll need medical documentation that matches your policy’s definition of disability. The insurer will review your claim, confirm you’ve met the waiting period, and then start benefits. Some conditions, like certain cancers or severe injuries such as loss of sight, hearing, both hands, both feet, or one hand and one foot, qualify for presumptive disability and automatic payouts. Others require a full determination process.

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How We Help

Disability insurance is about building a strong financial defense. You’ll hope you never need it, but if life throws you a major curveball, it could be the one decision that keeps your finances and your family’s future intact.

At The Dala Group, our financial planning process includes a detailed review of workplace benefits, cash flow needs, and available assets. That way, we can help you assess your risks and understand your options, so you can make intentional decisions. And adding disability insurance might be one of the smartest financial moves you ever make.

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Footnotes

[1] U.S. Social Security Administration, Office of the Chief Actuary, Probability of Disability and Death Before Full Retirement Age, Actuarial Note No. 2023.6 (June 2023)