State Disability Insurance Programs
A handful of states provide short-term disability coverage--typically for up to six months--that workers pay for through a payroll deduction. They are California, Hawaii, New Jersey, New York and Rhode Island, as well as Puerto Rico. For those who live in these states, this can be an important source of short-term income replacement.
Social Security
The federal government administers a disability insurance program that covers most workers, but qualifying for benefits is far from a sure thing and the payment levels (determined by your salary and work history) are fairly modest. About 60% of applications for Social Security disability benefits are initially denied, and the average monthly payment of current beneficiaries, $1,004, is barely above the poverty line.
Employer-Sponsored Coverage
The main source of disability income protection in the United States is coverage provided or sponsored by employers. Many employers, especially larger ones, provide their employees with group insurance coverage. There are two forms--short-term disability (STD), which replaces a significant percentage of your income for about three months in most cases, and long-term disability (LTD), which typically pays 40% to 60% of your base salary (pre-tax) for longer periods.
Often, employees will be given the option to add to the baseline coverage that their employer provides. Some companies don't provide disability coverage but help their employees by giving them the opportunity to purchase coverage on a voluntary basis. With this type of program, employees, rather than the employers, pay the full cost of the coverage. A benefit of purchasing disability coverage at the worksite is that it's generally easier to qualify for than coverage you purchase on your own. Check with your employer's human resources department or benefits manager to see what coverage and purchase options your company's plan provides.
Individual Disability Insurance
The most flexible and reliable source of coverage is an individual disability insurance policy you purchase on your own. A privately owned policy is portable, meaning you won't have to worry about losing coverage if you change jobs. Generally, most individual plans will pay between 40% to 65% of your pre-disability gross salary. When paid with after-tax dollars, benefits are received income-tax free.