how disability insurance works
oftentimes insurance products will protect against a specific loss such as when a property and casualty insurance plan reimburses the policyholder for the value of stolen property however in the case of disability insurance this compensation relates to the lost income caused by a disability for example if a worker earned 50 000 per year prior to becoming disabled and if their disability prevents them from continuing to work their disability insurance would compensate them for a portion of their lost income provided that they qualify in this sense disability insurance essentially covers the opportunity cost of the now disabled worker in practice there are many conditions that a policyholder must satisfy in order to receive these payments this is particularly true in regard to the u s social security system to qualify for government sponsored disability insurance applicants must prove that their disability is so severe that it prevents them from engaging in any type of meaningful work at all by contrast some private plans only require the applicant to demonstrate that they can no longer continue in the same line of work that they were previously engaged in the social security system also requires applicants to demonstrate that their disability is expected to last for at least 12 months or that it is expected to result in death 1as with all types of insurance disability insurance plans will carry more expensive premiums if their terms and conditions are more favorable to the policyholder conversely plans with less generous terms will typically carry lower insurance premiums some of the key features that affect insurance premiums in disability insurance plans include the length of the elimination period which is the length of time that the applicant must wait after becoming disabled before they can begin receiving benefits the benefit period which is how long those benefits continue to be paid and how strict the definition of disability is under the policy real world example of disability insuranceas a rough estimate disability insurance typically costs about 2 of the annual salary of the person being insured of course the actual amount will depend on the insurance carrier and on policy features such as those discussed above different individuals will have different preferences in terms of how much they are willing to pay in exchange for greater or poorer protections from potential disability to illustrate consider two hypothetical workers worker a is a professional working in a highly specialized field it took worker a ten years of post secondary education to become qualified in their field and this has allowed them to generate a relatively large income of 250 000 per year worker b on the other hand is a high school graduate who regularly switches between jobs and earns about 30 000 per year worker a knows that if they become disabled they may still be able to work in another field but this would very likely require a significant loss of income for this reason they decide to purchase a relatively expensive disability insurance plan that has a flexible definition of disability because of worker a s high income they can easily afford their relatively high premiums worker b on the other hand decides to opt for a plan with lower premiums even if that plan has a stricter definition of disability in addition to having fewer resources available to pay for premiums worker b is also less reluctant to work in an area outside of their current occupation since the nature of their work is less specialized 