Life Insurance vs. Disability Insurance

Insurance is the type of product that you hope to never use (and might grumble about paying for), but when you need it, you are glad you have it. Two of the most important types of insurance policies for working individuals are life insurance and disability insurance.

Life insurance is primarily meant to protect you and your family from the financial loss or hardship associated with an unexpected death. If you maintain the policy and pay the premiums, the insurance company will make a tax-free payment to your beneficiaries as compensation upon the insured’s passing. 

Disability insurance protects you and your family from the risk of income changes caused by injury or illness. Each policy has specific definitions of what counts as “disabled.” If your situation meets this definition, you will receive your benefit for the duration of the contractual period.

The loss of income from death or disability can cause financial harm, especially at a time when your family may have a mortgage, young children, college expenses or other costly financial responsibilities. Therefore, both types of insurance are an important part of a well-rounded financial plan. 

Although no one is required to purchase life or disability insurance, they are the most important types of insurance to purchase in terms of financial protection against the most devastating events that individuals and families could ever experience.

Daniel J. Adams, MBA, CFP®, CLU®Founder and President of CEG Life Insurance Services

As the founder of CEG Life Insurance Services, Daniel J. Adams has extensive experience with life and health insurance products. Daniel assists clients in building a secure financial future as a Certified Financial Planner™ professional and independent insurance agent. He also trains new agents and advises other financial professionals.

How Do Life Insurance and Disability Insurance Compare?

Life insurance is fairly easy to understand. When you buy life insurance, you are purchasing it for the benefit of someone else, as the policy pays out to the named beneficiaries when you pass away.

Disability insurance can be a fuzzier situation as it involves benefits for an individual who is still alive. For that reason, there are many different conditions and types of disability policies for various circumstances. 

Similarities Between Life Insurance and Disability Insurance

Life and disability insurance generally have similarly constructed contractual agreements. Insurance companies use large-scale probability analysis to determine the risk of an individual triggering a payment from their policy – whether that is a premature death, an injury or an illness-triggered disability. Age, location, health, hobbies and employment all factor into these calculations.

Both types of insurance are meant as financial safety nets. They aren’t medical insurance or medical benefits that seek to fix or solve any underlying insurance triggers. These policies are meant to offset the current or future loss of income. When considering policies like these, it is important to consider your financial responsibilities and needs in the context of the policies’ cost.

Differences Between Life Insurance and Disability Insurance

The biggest difference between disability and life insurance is that disability is meant to protect the income of an individual who is still alive, while life insurance is protection for the family or heirs of a deceased person.

Life insurance is most often utilized by individuals or families who have people depending on them financially. People who are young, single and have no dependents or large financial commitments often do not need life insurance.

An unexpected illness or injury that leaves a person disabled and unable to work is a very different scenario. The disability itself creates a financial burden that insurance can protect against. Therefore, disability can sometimes be just as financially burdensome for a young, single person as it would be for a person who is married with children. 

Unlike life insurance, which typically is a single one-time payment based on a singular event, disability insurance can payout for short- or long-term periods and payments may vary depending on different circumstances – such as the level of injury or income replacement. Many people who need disability insurance need both short-term and long-term disability. 

Types of Disability Insurance

Short-Term Disability (STD)

This type of policy is intended to cover individuals for a limited period, typically up to six months. Most policies will kick in after 14 days of the individual being unable to work due to a qualifying illness or injury. When paired with long-term disability, these policies will only last long enough to cover the elimination or waiting period of the long-term disability policy.

Long-Term Disability (LTD)

This type of policy is intended to cover individuals for an extended period of time for a qualifying illness or injury. LTD policies can offer benefits for many years and therefore have a longer elimination or waiting period before benefits start, which is usually 90 days.

Considerations: Life Insurance & Disability Insurance

Although both are forms of insurance, there are more differences than similarities between life insurance and disability insurance. Life insurance can be largely interchangeable, but no two disability policies are necessarily the same. When shopping for disability insurance, it is generally beneficial to work with a broker or agent because there are so many options to consider.

Which Should I Choose: Disability Insurance or Life Insurance?

Ideally, consider choosing both. Life insurance and disability insurance are meant to protect against different risks and will not be able to adequately replace one another. However, when combined, the two types of insurance can be incredibly significant for a well-rounded and robust financial plan. Disability insurance will not offer any benefits if the insured passes away and most life insurance will offer little to no benefits for disability unless there are specific riders added to the policy for an added cost. 

When Is Life Insurance Appropriate?

Life insurance is meant to protect an individual’s family or loved ones from the loss of current or future income. If you have people dependent on you financially, or if you have financial responsibilities that would burden other people if you died, then you may want to consider life insurance to offset those risks. 

Additionally, if you expect you may be more susceptible to chronic illness, due to family history or other factors, it may be beneficial to purchase life insurance before you could become uninsurable as the result of an illness. Certain medical diagnoses like cancer, lupus or long-term disability may preclude you from purchasing a policy or leave the cost of one prohibitively expensive. 

In the case of a disability, it is possible to buy certain riders for your policy at the time of purchase for additional protection. While these riders will not offer the same protections as a standalone disability policy, they offer the option of making your life insurance policy more flexible.

Types of Riders

Disability Income Rider

A disability income rider will pay out a benefit if you become disabled and can no longer work. It will not offer the same income potential as a standalone disability policy and will have distinct requirements for eligibility. In addition, it usually isn’t customizable and total benefits will generally be limited. 

Waiver of Premium Rider

A waiver of premium rider will allow your premiums to be paid by the insurance company in the event you cannot pay them due to loss of income from a covered illness or injury.

Accelerated Benefits Rider

An accelerated benefits rider will allow you to tap into the death benefit early (at a discount to the full value) in the case of a chronic, critical, or terminal illness. 

When Is Disability Insurance Appropriate?

Disability insurance offers income replacement for an individual who cannot work at all, or within their specific occupation, due to injury or illness.

Whether you are single or married, or have many financial responsibilities or none, disability insurance can be appropriate for everyone. It is especially relevant for those individuals who are primary income earners in their families. 

Disability is meant to provide steady income for weeks or years depending on the type of policy and contractual coverage.

Choosing an “own-occupation” disability policy allows an individual with a very high income or specialized skills to utilize their benefits if there is a condition that impairs them from doing their specific job. Even though it’s more expensive, it allows someone like a surgeon to receive compensation if they experience a hand injury. While general or “any occupation” policies will be much less expensive, a hand injury may not meet the threshold of general disability since a surgeon could still work in other capacities as a doctor, consultant or instructor. 

The more skill-based and higher-paying your occupation is, the more important it may be to have a policy tailored to your specific needs.

Can You Have Life Insurance and Disability Insurance at the Same Time?

You can have life insurance and disability insurance at the same time. However, most life insurance and disability insurance policies are bought as separate policies. Purchasing the policies at the same time through the same insurance company or agent may save you time and effort during the application process and from an additional medical exam.

The application process can often take a few months for each policy and completing both concurrently can simplify the process. Regardless of whether you purchase at the same time, from the same company or not, it is possible – and recommended – that you own both types of policies for optimal protection of your income and your family’s finances.

Editor Malori Malone contributed to this article.