What Does Disability Insurance Cover?

by Rod Howell ; Updated July 27, 2017
There are several disability insurance policies and programs available for injured and sick workers.

Workers can protect their incomes through several disability plans that are offered by insurance companies and the federal government. These insurance plans replace a portion of the individuals’ incomes while they are recovering from their medical conditions. Many illnesses and injuries that can sideline workers for short or long periods are covered by these plans.

Types of Disability Insurance

There are two private disability insurance plans available in the United States: Long-term and short-term. Both plans pay benefits for specific periods of time, with short-term disability insurance covering from a couple months up to a year, while long-term disability insurance provides coverage from one year to the rest of the insureds’ lives. Insureds of both plans also have to wait a specific amount of time before receiving benefits. Those insured by short-term plans typically wait between several days to weeks, while long-term plans have waiting periods that can last for several months.

Social Security Disability

The U.S. government sponsors a federal long-term disability insurance program called Social Security Disability (SSD). This program is entitled to every citizen who meets eligibility requirements. Applicants must have disabilities that last longer than one year. Those who qualify will have to wait at least five months before receiving benefits.

Are Disability Benefits Taxed?

The Internal Revenue Service taxes disability benefits that are paid from policies where insurance premiums are covered with pre-tax dollars. Employer-sponsored plans, for example, are generally paid with funds that haven’t been taxed. Most individually owned disability plans are paid with after-tax dollars and therefore the insureds are paid tax-free benefits. Government disability benefits are not taxed as income unless the amounts bring the insureds’ total earnings above income guidelines. For instance, individuals will pay taxes if their total incomes exceed $25,000; married couples with combined incomes over $32,000 must pay taxes on benefits as well.

Benefits of Disability Insurance

Disability insurance plans pay a percentage of the insureds’ salaries while they are unable to work. Without disability insurance, workers would have to use other financial resources, such as their savings accounts, retirement funds or even family and friends. With one in seven workers likely to become disabled for more than five years, according to Council for Disability Awareness, disability benefits can be their only means to maintaining an income.

What It Covers

Disability plans cover many different medical problems that can keep people out of work. Some of the most common short-term disabilities include maternity leaves, broken bones, diabetes and back injuries. Cancer, muscular tissue disorders and the losses of sight, hearing and limbs are some of the long-term disabilities that are covered.

Considerations

Both long- and short-term plans cover a percentage of the workers’ total incomes. Typically plans cover about half of their earnings, while some companies cover up to 80 percent, according to McClaren & Associates. Social Security benefits are based on the applicants’ earnings history and the number of credits (three-month working quarters) they’ve accumulated. The Social Security Administration generally mails annual benefit summaries to those who have paid into Social Security.

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