Short answer: No, life insurance does not cover disabilities; this is what disability insurance is for.
The best way to protect yourself and your family is by having both life insurance and disability insurance to replace your income if you cannot work. Many employers offer both life insurance and disability insurance coverage, but only five states in the U.S. require employees to receive short-term disability coverage (CA, HI, NJ, NY, and RI).
Life insurance is intended to pay your beneficiaries in the event of your death. In some cases, you can access life insurance benefits early (also known as “living benefits”), but it is typically reserved for people who have a terminal illness. Life insurance typically pays out in a lump sum, which is known as a “death benefit”.
Generally, individuals will obtain life insurance to help cover the costs associated with their death (such as funeral costs) and unexpected costs that their beneficiaries may incur. If, for example, the working parent in a family unexpectedly passes away and the other parent stayed home to take care of the children, the payout from life insurance could be used to help cover expenses that accrue while the surviving parent finds a different source of income.
Think of it this way: life insurance is not about you, personally; rather, it is intended to help provide financial relief to your beneficiaries.
Some insurers will offer a “disability rider” – like an add-on optional coverage that provides a little more security for a little additional cost. However, you do not have to combine your life insurance with your disability insurance. Sometimes, you can get more (or better) coverage if you obtain disability insurance separate from your life insurance.
Disability insurance is arguably more important than life insurance: if you are a young adult in your 20s, the odds are at least 25% (if not higher!) that you will become disabled before you retire. Serious accidents are one reason to have disability insurance, but there are other reasons, too. Disability insurance can help cover the costs associated with chronic conditions like back problems and muscle pain.
Disability insurance, in contrast to life insurance, pays a proportion of your salary (usually 60%) during times when you are too sick or injured to work. Disability insurance is not intended to cover medical care or long-term care services; this is what health insurance is for. This type of insurance also stops paying out at retirement age – 65 in the U.S.
In contrast to life insurance, disability insurance very much is about you. The payment of your income is intended to help you stay afloat as you recover from your disability. While it can also benefit your loved ones by providing some financial relief, it is intended to replace your paycheck while you’re unable to work – allowing you to continue paying your rent or mortgage and other bills.
Unlike life insurance, there is no way to borrow against your disability insurance policy.
Types of Disability Coverage Policies
There are both short-term and long-term disability policies.
Short term disability policies will pay a percentage of your income for up to six months. Short term disabilities can include childbirth, major surgery, arthritis, or illness. Some mental health can also be covered by short-term disability plans, especially when the issues you are struggling with make it nearly impossible to fulfill your work responsibilities.
Long term disability policies can pay a percentage of your income up to retirement age. Long-term disabilities can include different types of cancers and permanent injuries from a severe accident. Some mental health can also be covered by long-term disability plans, provided that they are not characterized as pre-existing conditions. Long-term disability policies will typically go into effect after short-term disability coverage expires but you are still unable to return to work due to a disability.
There are other types of disability insurance policies, including mortgage disability insurance, supplemental disability insurance, social security disability insurance, state disability insurance, and workers’ compensation. It can be difficult to navigate all the different types of disability insurance policies and to know what is right for your circumstances, which is why having an insurance agent can be tremendously helpful.
It is important to review your insurance policy carefully to understand what is covered and what is not. Take the time to determine what the best coverage is for you. Life insurance disability riders typically provide fewer benefits than individual disability policies but offer lower monthly payments. Talk to your insurance representative about future increase options which permit you to increase your insurance coverage as your income grows.
If you have any questions, or if you want to learn about what your options may be in terms of obtaining or increasing your coverage, you should speak to your insurance representative immediately.