Plain version: for most working people, the biggest asset is the ability to earn a paycheck. Disability income insurance replaces part of that paycheck when sickness or injury stops the person from working.
Definitions of disability:
Own occupation: unable to perform the duties of one's own occupation. A surgeon who can no longer operate is totally disabled even if she now earns a full salary teaching.
Any occupation: unable to do any job suited to the person's education, training and experience. This is harder to meet.
Social Security: stricter still. It pays only for total disability: the person must be unable to do previous work or adjust to other work, and the condition must last at least 12 months or be expected to result in death. It pays nothing for partial or short-term disability.
Partial disability: inability to perform some duties or to work full time. It typically pays a set fraction of the total disability benefit for a limited period.
Occupational vs. nonoccupational coverage: nonoccupational coverage pays only for disabilities that do not arise from work, because workers' compensation is meant to handle job injuries. Occupational coverage also covers disabilities that arise on the job.
Why insurers limit coverage amounts: benefits are kept to a portion of earned income. If someone could earn as much or more while disabled, the incentive to recover and return to work would fall and claims would rise. Keeping benefits below earnings controls this moral hazard and avoids overinsurance.
Short-term vs. long-term disability:
Short-term coverage fills early gaps but runs out.
Long-term coverage, with a long benefit period (for example, to age 65), protects against a career-ending disability.
A person with savings can pick a long elimination period to lower the premium. Someone with no savings or paid sick leave may need both short-term and long-term coverage.