People with disabilities typically have a few options at their disposal concerning insurance. This includes private insurance options like private long-term disability insurance, life insurance, or government-funded options like Social Security Disability Insurance (SSDI). Life insurance and SSDI are different types of insurance with different purposes.
Life insurance is designed to provide financial protection to a beneficiary’s loved ones in the event of their passing. On the other hand, SSDI is designed to supplement an individual’s income if they become unable to work due to a disability.
This article compares the two types of insurance in more detail.
Overview of Life Insurance
A life insurance policy is a contract between a policyholder and an insurance company.
When you pass away, the insurance company will pay a certain amount of money to the person or people that you have selected. In exchange, you are required to make premium payments throughout the duration of your life insurance policy.
Life insurance does not provide financial security if you sustain a medical condition or injury that causes long-term disability. The benefit amount is only paid out in the event that the insured person passes away.
Life insurance policies sometimes have the option to include riders, which are additional benefits or extensions that can be added to the policy. If you expand your life insurance with a disability income rider, for example, the policy will pay out benefits in the event that you become disabled due to an accident or illness.
Overview of SSDI
Social Security Disability Insurance will safeguard your most important asset: your income. It can help cover some of your living expenses in the event that you become disabled due to an illness or injury.
However, to qualify for these benefits, individuals must have paid enough into Social Security taxes, in addition to meeting the stringent disability criteria set forth by the Social Security Administration.
Life Insurance or SSDI
A life insurance policy is very different from SSDI. Life insurance provides your loved ones with financial security in the event that you pass away. The payout is made to your beneficiaries after your death. Disability insurance, on the other hand, safeguards your income in the event that you are unable to work due to a disability.
Purchasing either type of policy comes with its own pros and cons, some of which we will discuss in this section.
1. Financial Protection
Life Insurance
If you have a life insurance policy, your beneficiaries will receive a death benefit. This money can be used to pay for things like a mortgage and college fees for your children. It can also serve as a safety net for unexpected costs.
The death benefit is typically distributed in the form of a tax-free lump sum, which means that your family will be able to spend the money for whatever they require, including the following:
- Your end-of-life expenses, such as those for a funeral or medical care,
- Housing expenditures, such as mortgage or rent payments
- Credit card, automobile, and student loan debts
- College expenses for your children
- Childcare
- Replacement of your financial support
- Basic living expenses, such as food, transportation, and medical care
SSDI
SSDI is a form of insurance that is provided to those who are unable to work due to a qualifying disability. SSDI is meant to replace lost income over time rather than a one-time payout like life insurance. Similar to life insurance, these benefits can be put to use however the beneficiary wishes.
2. Costs
Life Insurance
Life insurance is the most affordable when you are young and have few health problems. Your exact insurance costs will vary based on your medical history, your family’s medical history, and your age.
However, if you’re an older person or have been diagnosed with a serious health condition, life insurance can be quite expensive and might not be worthwhile.
The presence of risk factors in your application, such as a long-term medical condition or a dangerous hobby such as skydiving, might lead life insurance companies to charge you a higher premium for providing coverage.
Make sure to inform the agent regarding any health conditions you may have to receive the most accurate estimates.
Whole life insurance, in comparison to term life, is significantly more expensive and can cost hundreds of dollars monthly. Getting a whole life policy when you’re still young will cost you a lot of money for something you might not need. This is because most people don’t require as much life insurance once they retire.
Consider term life instead for a more budget-friendly option. You will not pay more than necessary for your premiums, and your coverage will only be in effect for the amount of time that you need it.
SSDI
Unlike life insurance premiums, SSDI does not require individuals to make regular, direct monthly premium payments. Rather, Social Security Disability Insurance is funded by the government via payroll deductions from contributions to Social Security taxes.
The Federal Insurance Contributions Act (FICA) mandates employees and the companies they work for to make these contributions, which are then distributed among the various Social Security programs.
So, if you’re worried about the high cost of life insurance, you might want to look into SSDI instead. The program’s affordability is tied to your employment history.
3. Purpose
Life Insurance
The purpose of life insurance is to provide financial security for your family in the event of your death. This is why the vast majority of individuals opt to secure life insurance policies that extend coverage into retirement.
A life insurance policy can safeguard your loved ones’ financial security in the event that you pass away before you retire, which is especially important if you have debt or someone who relies on your earnings.
SSDI
The main purpose of SSDI is to assist people who are unable to work due to a qualifying disability. It acts as a form of income replacement, assisting disabled individuals in meeting their fundamental living expenses.
5. Personalization
Life Insurance
Life insurance riders are supplemental coverage options that policyholders can choose to add to their primary policy in case of specific needs. With the help of your agent, you can find out what riders can be purchased for your policy and whether they are financially worthwhile to add.
Here are some commonly available riders:
- Accelerated death benefit rider: If you get diagnosed with a terminal disease, you may be able to receive all or part of your death benefit before your death.
- Long-term care rider: If you need long-term care, for instance, care in a nursing home, you can use money from your death benefit to cover the costs.
- Term conversion rider: A term conversion rider allows you to change your term life insurance plan to a long-term life insurance policy.
SSDI
SSDI benefits are not typically customizable on an individual basis. Instead, eligibility and benefit levels are determined by the Social Security Administration based on certain criteria that the agency has established.
To determine the amount of SSDI benefits a person receives, the SSA employs a formula that takes into account a variety of factors, including the individual’s previous employment history and earnings. The beneficiary does not have the option to negotiate or customize the amount of benefits.
Any revisions or improvements to SSDI would be contingent upon shifts in government policy and law.
6. The Application Process
Life Insurance
Life insurance usually raises several questions: How can you choose the most suitable policy? Would it be better to purchase a whole-life or term insurance policy? Is there a company that charges less than others for a comparable risk factor?
Once an individual has determined the answers to these questions and found the best policy for them, they will typically be required to fill out extensive paperwork, undergo a medical exam set up by the insurance company, and provide an extensive medical history for both themselves and their immediate family.
SSDI
The application process for SSDI can be hectic and time-consuming, particularly for individuals who already struggle with the obstacles that their disabilities present. In addition to this, applicants often go through significant delays and waiting periods when applying for SSDI benefits.
There is also a waiting period after submitting an SSDI application before benefits are awarded, adding to the already lengthy application procedure.
The length of this waiting time can vary, but it could put applicants who are in need of income in a difficult financial position. Delays can be especially problematic for people who are unable to provide for themselves and rely on having timely access to assistance from the government.
During these times, you’ll need to prepare ahead of time and, in certain cases, look for other ways to make ends meet while you wait for a decision from Social Security.
According to the USA Facts website, wait times for Social Security disability benefit decisions reached a new high in 2023.
Applicants now have to wait over seven months for a decision on an initial application, up 86% from 2019.
7. Denial Rates
Life Insurance
Statistics pertaining to life insurance claims show that the percentage of claims denied by insurers varies significantly from one firm to the next. In the year 2020, approximately 18% of on-network health insurance claims, which includes claims for life insurance, were rejected.
The denial rates for individual insurers, on the other hand, varied from less than one percent to more than 80%. Therefore, predicting the likelihood of your insurer denying your claim is challenging.
SSDI
Statistics show that the vast majority of initial SSDI applications are denied, with an acceptance rate that averages out to 22%. A denial like this can be discouraging for applicants who have a legitimate need for financial support due to their impairments.
These high rates of initial denials frequently add to the stress of people who are already dealing with the challenges caused by their conditions, given that they have to go through more hurdles to get their claims reviewed again.
Given the high number of initial denials, many eligible applicants are forced to file an appeal. This is another complicated process that requires a full understanding of the SSA’s rules and procedures.
It is highly recommended to get legal counsel at the appeals stage. Having a lawyer on your side can make all the difference when appealing your benefits; it can also make the process less complicated.
Can I Get Disability Coverage through Life Insurance?
Disability insurance is the industry standard when it comes to safeguarding your income in the event of an illness or injury. However, if you are unable to afford an additional policy, you should look into adding a disability rider to the life insurance policy that you already have.
Adding riders to your life insurance policy allows you to modify your coverage to meet your specific requirements, usually at a small additional cost. There are three types of riders that may be useful if you become disabled due to illness or injury:
1. A disability income rider offers a monthly supplemental income payment in the case of illness or injury that results in disability.
The amount of disability payments is often calculated as a percentage of the total face value of the policy. A one million dollar policy with a one percent disability income benefit would pay out $1,000 per month.
2. A premium rider waiver allows you to keep your coverage without paying premiums if you qualify for total disability. It is important to make sure that you research several policies before you sign up for life insurance because the definition of disability can vary greatly from one life insurance company to the next.
3. An accelerated death benefit rider permits you to use a portion of your death benefit if you are diagnosed with a terminal disease.
Conclusion
So, if you’re having trouble deciding between getting a life insurance policy or just relying on SSDI benefits, you can either go through our guide above to determine which one is best for you or you can purchase a life insurance policy with a disability income rider. This will allow you to reap both the benefits of a life and disability insurance policy.
