Long-Term Disability Insurance

A long-term disability can be financially devastating.  While you may be able to use personal savings to cover your expenses temporarily while not working, most people are financially unprepared to be suddenly out of work for an extended period of time, or be permanently unemployable.

When you’re thinking about disability insurance, think about the impact that losing your (or your spouse’s) salary would have on your overall family finances.  If you provide 100% of your family’s salary, or if you are a single person providing 100% of your own living income, how will you manage to pay bills and meet expenses without any income if you become disabled and unable to work?  If you do have someone else contributing to your income, how much are they contributing to your overall household income?  For example, if you earn $35,000 and your spouse earns $25,000, your total household income is $60,000.  Your salary makes up 58% of that amount.  If you became disabled and unable to work, losing your salary means your household income would be more than cut in half.  Do the same calculation for any other income coming into your household.  What impact would losing your spouse’s income make?

It’s important to note that long-term DISABILITY insurance is NOT long-term CARE insurance.  Long-term care insurance helps people pay for assistance with daily living activities (i.e. eating, bathing, dressing) because they are unable to perform those activities themselves due to an illness, injury or old-age.  Long-term disability insurance provides you with a partial replacement of your income for a specified amount of time while you are unable to work, or if you are forced to find a job paying less due to your disability.

What Disabilities are Covered
The definition of “disabled” varies widely.  If you are considering purchasing long- term disability insurance, it’s important to know how a potential insurance company defines “disabled” or “disability” so you know when, and under what conditions, you are eligible to receive benefits.  For example, some companies define “disabled” as being unable to continue in your current job. Others define “disabled” as being unable to work at all. 

Types of Long-Term Disability Insurance Policies
There are two major types of long-term disability insurance: (1) guaranteed renewable policies, and (2) non-cancelable policies.

  • Guaranteed renewable policy. With this form of long-term disability insurance, your policy is guaranteed to be renewed as long as you make your premium payments on time.  However, your insurance company can increase your premium if it does so for all the other policyholders in your rating class.
  • Non-cancelable policy.  With this form of long-term disability insurance, your policy cannot be canceled if you pay your premiums on time AND your premium rate will not be raised AND your benefits cannot be reduced.

What It Pays
Long-term disability insurance will pay you a percentage of your salary while you are unable to work.  So if you are in a job paying $50,000 a year and your long-term disability insurance policy pays 60 percent of your salary, you will receive $30,000 in benefits while disabled. 

If you become able to work again, but at a job that pays less than your former job, it will likely pay the same percentage of benefits for the lower salary. For example, let’s say you are working at the same job making $50,000 and have an off-the job injury that makes it not possible for you to work.  Your long-term disability insurance will pay 60 percent of your current salary.  So while you are disabled it will pay you $30,000.  Then, after a year, you are able to return to work, but at a job making only $30,000.  That same long-term disability insurance will now pay 60 percent of the lesser income IN ADDITION TO the salary you are currently making.  So you will continue to receive your $30,000 in your new job AND $18,000, making your total income $48,000.

In addition to paying salary benefits, some policies will pay for additional expenses related to your disability such as occupational therapy to help you re-enter the workforce, and childcare if your spouse must return to work because of your disability.

What It Will Cost You
You will have to pay an annual premium for long-term disability insurance coverage.  If you pay the premium yourself, your disability benefits will be tax-free (meaning that you will not have to pay taxes on the insurance benefits that you receive).  However if your employer pays your long-term disability insurance premium, your disability benefits will most likely be taxable.

If you are disabled for 90 days or longer and receive benefits, many policies have a “waiver of premium” clause.  That means you will not have to pay the policy premium for as long as you are unable to work.

When It Won’t Pay
Most long-term disability insurance policies have conditions under which it will NOT pay benefits.  Examples include when the disability is the result of an attempted crime, suicide, drug abuse or war.  Some policies will not allow for pre-existing conditions or disability due to an elective procedure (such as cosmetic surgery), so make sure you know what conditions are and are not approved for coverage are outlined in your policy.

When It Pays & For How Long
Most long-term disability insurance policies have a waiting period before they begin paying out benefits.  The standard waiting period is 90 days, meaning it will begin paying benefits 90 days after you have been verified as disabled and unable to work.  If you have short-term disability insurance, then your long-term disability policy would kick in when your short-term benefits expire, usually after being out of work for between one and six months.  Plans vary widely in their waiting periods, and some plans allow you to choose a longer waiting period for a lower premium (meaning you have to pay less for the policy if you’re willing to wait longer to receive benefits).

All long-term disability insurance policies will pay a percentage of your salary – typically 50, 60, or 66 2/3 percent - for a specified period of time.  You get to choose how long you want to receive benefits – typically the choices are for two years, five years or until age 65.

Where You Can Obtain It
You may be able to purchase long-term group disability insurance through your job.  If your employer does not offer long-term disability insurance, or if you don’t think that the plan offers you adequate benefits, you may want to consider purchasing an individual policy.  Individual plans are typically more expensive than group plans and you will have to take a medical exam to be eligible for coverage.  You can purchase individual long-term disability policies through companies online, through life insurance agents or a life insurance company—or you can talk with a certified financial planner for recommendations. Click here to learn more about how to work with a financial professional.

If you are a member of an organization or professional association outside of, or affiliated with your job, you might want to check to see if they offer group disability insurance options.

Before rushing to make a choice, and a commitment, about disability insurance spend some time shopping around to compare coverage differences and prices.  Your job will, in large part, also affect what kind of coverage you can get and how much it will cost.  For example, people in high-risk jobs, such as construction, may find it very difficult, and very expensive, to obtain coverage.  Keep looking and ask your employer, or any associations or organizations to which you belong, if they offer disability insurance discounts for members.

How Much Coverage to Consider
When you purchase long-term disability insurance you choose to receive a percentage of your income for a designated amount of time in the event that you are unable to work.  So how much of your current income will you need to live on?  What percentage of your current income would you need to continue receiving to pay bills and maintain your standard of living if you could not work?

Most insurance experts will recommend that you get enough coverage to receive 60%, or, ideally, 80% of your current income in long-term disability benefits.  When thinking about your income needs, try to imagine how being disabled would affect your lifestyle and budget.  For example, if you were unable to work, you would no longer have work-related travel costs.  However, you might have increased medical costs.

To begin estimating how much of your income you may need if you were to become disabled, take a look at your current budget.  See how much you currently spend.  Then tally up how much income you would have if you were to become disabled. Then subtract your expenses from income, put it in a percentage format and you’ll have the percentage maximum amount of disability coverage that you will likely want to purchase.

Additional Coverage Options
In addition to standard long-term disability benefits, you may have the option to purchase “riders” which offer additional benefits such as:

  • Cost of Living Adjustment (COLA) – After you have been disabled for one year, this rider provides an annual increase in your monthly benefits (between 4 and 10 percent) to help offset inflation.
  • Future Purchase Option – This benefit enables you to purchase additional coverage without proof of medical insurability.
  • Residual Benefit – This benefit pays a portion of your monthly disability benefit if you are unable to resume your full responsibilities at your current job due to your disability.