Disability Insurance: Protecting Against Social Security Shortfalls

August 3, 2015

Disability InsuranceMost Americans, whether they have it or not, are familiar with the benefits of life insurance. It's a safeguard, protecting your family in the unfortunate event that something tragic happens to you and you aren't around to take care of them. Yet few consider what if something happens and you are still around.

According to the U.S. Social Security Administration, approximately one in four people in their 20s today will become disabled before they retire.1 Social Security and employee-sponsored workers' compensation may provide some help, but it is unlikely that they will be enough to replace a worker's salary. Furthermore, Social Security and workers' compensation may fail to cover all types of disability. The Council for Disability Awareness found that 95% of annual reported claims were not work related.2

Disability insurance provides some income protection for individuals who are no longer able to work due to injury, illness or psychological disorder. There are two main types of disability insurance plans:

Group plans: Often offered through employers, the costs and benefits provided by group plans may differ significantly from one another. Typically, group plans do not fully replace income, and many plans put a cap on yearly benefits and may limit the duration for receiving benefits. Group plans are the most popular form of disability insurance.

Individual plans: Based on individual needs and situations, prices for individual plans can be much higher than group plans. However, individual plans offer more options, including coverage of bonus income and the ability to keep the plan even if you change jobs. Typically, individual plans offer the highest benefits.

While premiums can vary, most individual and group policies cost between 1 and 3 percent of your annual salary and provide between 60 and 80 percent of your income in the event that you can no longer work. Despite this high rate of return, most people do not have disability insurance because of the cost or what they see as a low probability of becoming unable to continue to work. Yet, according to a report by the Social Security Administration, "an insured female worker who attained age 20 in 2013 has a 19 percent chance of becoming disabled before age 60. In addition, the probability that she will die before age 60 without receiving Social Security is only 3 percent."3 For most workers, especially young workers, the likelihood of needing disability insurance is greater than life insurance.


1 - U.S. Social Security Administration, "Social Security Basic Facts," April 2, 2014,

2 - Council for Disability Awareness, 2012 Long-Term Disability Claims Review,

3 - Johanna Maleh, Robert Baldwin and Jason Schultz, Actuarial Note: Death and Disability Life Table for Insured Workers Born in 1993, Social Security Administration, Office of the Chief Actuary (Baltimore, Maryland), January 2014,