The Purpose of Disability Insurance

The Purpose of Disability Insurance
••• wheelchair access sign image by Gina Smith from

Disability insurance provides replacement income in the event someone can no longer work due to an illness or injury. According to the Social Security Administration, a 20-year-old worker has a three in 10 chance of becoming disabled before retirement age. There are several kinds of disability insurance that have different qualifications for claiming the benefits and different benefit amounts.


A form of private disability insurance became popular in the 1910s, but during the Great Depression the fraudulent claims skyrocketed and reforms were implemented. Around the same time, in 1936, the Social Security Administration began considering the implementation of a government-run disability program. Due to the pressing concerns of the Depression and then World War II, the measure was not actually passed or implemented until 1956.


The law that passed in 1956 stated that a disability was "an impairment of mind or body which continuously renders it impossible for the disabled person to follow any substantial gainful occupation," and was likely to last for "the rest of a person's life." That definition is still adhered to in 2010 for the most part.

Government Sponsored

SSDI, or Social Security Disability Insurance, is available to workers who are disabled for at least 12 months. It can be very difficult to qualify for SSDI and the average amount of SSDI benefits is only around $1,000 per month, regardless of pre-disability income. To qualify, you must have worked long enough and paid social security taxes.

Employer Sponsored

Many employers provide their employees with either short-term or long-term disability insurance. Some may provide both, or offer both for employees to purchase individually. Short-term policies replace income for up to six months. Most long-term policies take effect after the short-term policy ends and usually last until retirement age. Long-term policies usually replace around 60 percent of the disabled person’s pre-disability income. Workers’ compensation is another form of disability insurance that provides financial assistance of up to two-thirds of pre-disability income for workers who are injured or become ill on the job.


Disability insurance provides at least some income to workers who can no longer work. For small business owners, disability insurance can also offer business protection, recovery benefits, buy-out benefits to help one joint owner buy out the disabled joint owner, and key-person insurance, which provides benefits if an essential employee responsible for the lion’s share of the business’s income is disabled.