An insurance policy that pays part of a personÂ’s salary, typically 60 or 70 percent, in the event that the person is unable to work for an extended period of time. Often, disability insurance policies are broken down into short- and long-term policies. Disability payments begin after a predetermined time period. If the individual pays for the disability insurance, then the insurance payments are tax free. However, if an employer paid the premiums, then the disability payments are taxed. Disability benefits are also available through the Social Security Administration.