Disability Insurance

What It Means

When a person cannot work because of an accident or illness, disability insurance (sometimes called disability income insurance) replaces a portion of that person’s income. For example, if a painter had disability insurance and one day, while working on the outside of a house, slipped off his ladder and broke his leg, he would receive monthly checks to pay for his living expenses. He would continue to receive money until his leg healed and he was able to go back to work.

In many countries some form of disability insurance is provided by the government. In the United States the national government provides several types of assistance for the disabled. Social Security Disability Insurance (SSDI), available to workers under the age of 65, covers people who cannot do any “substantial gainful activity”—that is, people who cannot do any job, regardless of their profession before the disability. In the example of the painter, if he were still able to do another job, such as telemarketing or working in a tollbooth, he would not be eligible for SSDI. Some disabled people with very low incomes, including those 65 years or older, might also be eligible for additional money called Supplemental Security Income. The U.S. Department of Veterans Affairs provides money and other forms of assistance to disabled soldiers.

Private disability insurance also exists. In the United States, because government assistance is available for some disabled people, private disability insurance is directed toward people who want to protect themselves against the possibility of being disabled but not qualifying for SSDI or for people who, in the case of a disability, would like a higher income than SSDI would provide. A lawyer, for instance, could purchase private disability insurance that would provide income if he had an accident or illness that prevented him from working in his existing profession, the law. In order to receive SSDI, the accident or illness would need to keep him from doing any work at all.

Private disability insurance is sometimes provided by companies for their employees. Individuals can also purchase it.

When Did It Begin

The idea of disability insurance, providing income to ill or injured people who cannot work, is not new. Some early examples were for soldiers. The ancient Greeks cared for their ill soldiers until they recovered, and in the seventeenth century soldiers in Holland were insured against the loss of hands or feet and other physical problems. In 1757 the British government provided assistance to dock workers who were sick or injured.

Private disability insurance in the United States began to be popular in the early twentieth century. Insurance companies, unlike in previous times, started offering disability insurance that could not be canceled by the company and for which premiums (the payment for the insurance) could not increase.

During the Great Depression (the worldwide economic downturn that began in 1929 and lasted until about 1939) the U.S. government took a greater role in protecting Americans from economic risk. In 1935 it passed the Social Security Act, which provided income assistance to retired workers aged 65 or older. In the mid-1950s the act was amended to assist younger Americans who were involuntarily retired, or disabled, because of an accident or illness.

As the government became more involved in protecting Americans from complete poverty, insurance companies increasingly sold disability insurance to wealthier consumers and professionals, including physicians.

More Detailed Information

Private disability insurance can be divided into two categories, short term and long term. Short-term disability insurance covers a worker for a period of a few weeks to a couple years. Companies often provide short-term disability insurance to their employees. Long-term disability insurance might last five years or longer, sometimes until the worker is 65 years old, when he or she would qualify for income payments from Social Security.

Important in any disability insurance is how it defines disability. Some insurance will cover a person who can no longer work in his or her chosen profession, such as teaching. According to other insurance, however, a person is disabled only when he or she cannot find work consistent with his or her training or experience. A doctor who suffered brain damage from a fall, for example, would not need to look for work that required little education, such as a job at a fast-food restaurant.

Disability insurance generally covers only a portion of the person’s previous income. Sixty percent of the former monthly salary is common, though with more expensive insurance, one can receive a higher percentage. Some insurance will provide a monthly payment, though reduced, to disabled people who can return to work part-time.

People buy disability insurance with the hope they will never be disabled and thus will never have to use it. One has to make a choice between making lower payments now and possibly receiving less income later or making higher payments now and possibly receiving more income in the future. As with any insurance, it is a risk.

Recent Trends

In the 1980s U.S. insurance companies competed aggressively to sell disability insurance to professionals, especially physicians. Doctors made a lot of money and could afford insurance, and they also tended to be dedicated to their work even when they developed physical problems.

In the 1990s—a decade that saw a dramatic increase in health-care costs and in the popularity of managed-care companies, such as HMOs and PPOs (health maintenance organizations and preferred provider organizations, respectively, which both attempted to limit health-care costs, including physicians’ fees)—doctors began to make less money, and many were frustrated with the new working conditions of managed care. As a result, an increasing number of physicians with physical ailments chose to stop working and to collect disability payments. Companies selling disability insurance, which once viewed physicians as attractive clients, suffered huge losses.