Disability Insurance

A type of insurance that protects workers when they lose employability and earned income due to becoming disabled

What is Disability Insurance?

Disability insurance is a type of insurance protecting workers when they lose employability and earned income due to becoming disabled. In the case of disability, the worker will be compensated by disability insurance. The main purpose of disability insurance is to protect workers against disability risk. Disability insurance is usually funded by the government and the employer together.


Disability Insurance


Depending on the job characteristics and legislation, disability insurance differs in their criteria for compensation. Generally, disability insurance compensates an employee when they lose their employability and their ability to earn an income due to workplace risk.



  • Disability insurance protects workers against the disability that leads to the loss of their job or income.
  • There are two types of disability insurance – short-term and long-term.
  • Disability insurance is usually funded by the government, employers, and employees; private disability insurance is also an option.


Compensation of Disability Insurance

The compensation of disability insurance is calculated based on the worker’s salary and the severity of the disability. It usually pays benefits in proportion to the worker’s salary. The compensation period depends on the seriousness of the disability and existing legislation.


Types of Disability Insurance

There are two types of disability insurance, short-term and long-term disability insurance.


1. Short-term disability insurance

Short-term disability policies compensate workers when they are not able to perform their job temporarily. Such policies may provide payments for up to two years. The short-term disability policy is usually provided if the worker becomes temporarily sick or injured.


2. Long-term disability insurance

Long-term disability policies compensate workers when they are not able to perform their job for a longer period or on a permanent basis. Such policies may pay the benefit for years or until the disability ends.


Disability Insurance Providers

Disability insurance is often seen as an unwanted risk that needs to be captured by the social benefits system. Hence, disability insurance is obligatorily included in the working contract in many countries.

The providers of disability insurance involve the government, employers, and employees. Private companies are an additional choice for individuals.


1. Government

The government funds disability insurance against bad risk as part of social security. The funding is usually derived from taxes. Additionally, the government makes disability insurance mandatorily included in working contracts.


2. Employer

The employer is also a disability insurance contributor. It is not only seen as a work benefit apart from salary but is also mandatory. Depending on the industry and profession, the employer is subject to contribute differently to the disability insurance funding.


3. Employee

In many countries, the employee is subject to contribute their social security from their own wages, and part of this contribution is added to the disability insurance fund.


4. Private companies

Many insurance companies sell disability insurance to customers. Individuals can opt for private disability insurance to meet their needs. For example, a worker in a hazardous profession may choose to include additional disability insurance from a private company.


More Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

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