What if a serious injury or illness prevents you from working? Without your main source of income, would you still be able to pay the bills and take care of your family? What would happen to your hard-earned retirement savings?
While these questions aren’t fun to think about, answering them can help you prepare for the unexpected and improve your long-term financial health. herein lies the value of long-term disability insurance.
To learn everything you need to know about this important type of income protection, read our 2022 guide to long-term disability coverage below.
- what is long-term disability insurance?
- How does long-term disability insurance work?
- What does long-term disability insurance cover?
- How much does long-term disability insurance cost?
- how to apply for long-term disability insurance
- Do I need long-term disability insurance?
- Is long-term disability insurance worth it?
- the benefit amount, or how much it will pay you monthly for long-term disability if you become disabled.
- the elimination period, or the amount of time you must wait after a disabling event before your long-term disability benefits start.
- the benefit period, or how long your long-term disability benefits will last if you become disabled.
- the definition of disability, or what types of conditions your policy will and will not cover.
- the amount of the premium, or how much disability insurance will cost you monthly and annually.
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Long-term disability insurance is defined as a policy that pays you, the policyholder, direct monthly benefits to replace a portion of your income if you become disabled and unable to work at your occupation.
This form of disability insurance is designed to cover serious injuries and illnesses that keep you out of work for three months or more, as well as permanent disabilities that leave you unable to return to work.
Long-term disability coverage is a smart investment for healthy, employed people who want to secure their financial future. you can get coverage alone, as part of a group, or both.
For the most part, long-term disability works like any other type of insurance.
As the policyholder, you make recurring premium payments, usually from month to month. In exchange, your insurance company agrees to pay you long-term disability benefits if you have a serious injury or illness that prevents you from working for an extended period of time.
Each long-term disability insurance policy details:
Let’s dive into each of these.
How much does long-term disability insurance pay?
Your policy benefit amount determines how much you will receive in long-term disability benefits if you become disabled.
In most cases, your benefit amount will be a percentage of your income. the amount of your disability insurance benefit will depend on the policy. In general, long-term disability policies can replace 60 to 80 percent of your income.
In addition, many policies replace lost income if you have to take a low-paying job due to injury or illness.
when does long-term disability insurance go into effect?
Long-term disability coverage begins after you are approved by the insurance company, you accept the coverage offer made to you, and you begin paying your premiums.
however, when long-term disability benefits start is not that simple.
The elimination period of your policy will determine when long-term disability benefits kick in if you become disabled. this is also known as the waiting period because it sets the length of time you must wait after your disabling event before you start receiving benefits.
When you apply for long-term disability coverage, your waiting period options generally include 30, 60, 90, 180, or 365 days.
How long does long-term disability insurance last?
Long-term disability coverage lasts as long as you make your premium payments on time and in full. that simple.
However, it is important to note that long-term disability benefits may not last forever if you need to receive them.
The duration of your long-term disability benefits depends on the benefit period of your policy. the benefit period can be a certain number of months or years, or up to a certain age. Generally, benefit period options for long-term disability insurance policies include 2, 5, or 10 years, or until retirement age (65, 67, or 70).
do you have to repay long-term disability insurance benefits?
Usually, you won’t have to repay private long-term disability insurance benefits. these benefits are treated as tax-free income that you have earned by paying the premiums. however, there are rare exceptions where you may need to return a portion.
By law, you are allowed to collect benefits from a private insurer and from the government. in fact, you are required to do so if your private long-term disability policy has a compensation provision. The amount of Social Security Disability Insurance (SSDI) benefits you collect will be deducted from what your private insurer pays you.
ssdi benefits are difficult to approve. if you are approved, it could still be months, even years, before you start receiving benefits. That’s why SSDI benefits start with something called a recovery payment. It’s a lump sum that offsets the time it took for the Social Security Administration (SSA) to review your application.
Meanwhile, long-term disability is easier. Approval is quicker and benefits begin to be paid as soon as your elimination period ends, likely before your application for SSDI benefits is processed. If so, the compensation provision of your policy will require you to pay the SSDI recovery payment you received to your private insurer. That way, your SSDI benefits are accurately deducted from the private benefits you receive.
These are the top five reasons to file long-term disability claims:
- musculoskeletal disorders
- mental health problems, such as depression and anxiety
- injuries such as fractures, sprains, and strains of muscles and ligaments
As you can see, the scope of event disabling is wide. That’s why perhaps the most important factor when considering long-term disability insurance is a policy’s definition of disability.
How a policy defines disability will determine how much, and even if, it will collect benefits after an injury or illness. Some policies will pay a monthly benefit if an injury prevents you from working at your normal job, but allows you to do other types of work that will nonetheless reduce your income. Other policies will not pay benefits if she can work in another type of profession, even if she earns less money.
A policy’s definition of disability is based on your ability to work. she may not be able to work in her chosen profession, but she can do another job. a disability may allow you to work in a reduced capacity. serious ailments can prevent you from working at any job.
To collect a claim, you must meet the policy’s definition of disability. this can vary greatly by carrier and policy. the broader the definition, the more it will cost.
definition of disability
Long-term disability insurance policies will generally define disability in one of four ways.
An any occupation definition of disability means that you are not eligible for benefits if you are able to work any other job. This is true even if the jobs you can do with a disability pay much less than what you earned before you became disabled.
any occupation is the strictest definition of disability that a policy can have. a policy for any occupation will generally require the lowest premiums. but it will also result in the least amount of coverage.
an own occupation the definition of disability is the opposite of any occupation. A policy with a self-occupation definition of disability protects her ability to work in her given profession.
You will be covered if a disability prevents or limits the work you had when you became disabled. Even if you are able to work in another capacity, you will still be eligible for benefits. You can also collect benefits on a self-occupancy policy if:
- have to work fewer hours because of a disability.
- There are some tasks in your job that you can’t do.
- may perform some, but not all, of the material tasks of your occupation.
- cannot work for a certain percentage of the time.
- reach a certain age.
- after a major life event.
- Your annual income increases.
- You will lose access to group coverage.
- hear in both ears
- seen in both eyes
- use of both hands
- use of both feet
- use of one hand and one foot
- self-inflicted acts
- criminal activities
- acts of war
- civil disobedience or rebellion
- operate a motor vehicle while intoxicated
- a 40 year old will pay $82 a month
- a 45 year old will pay $104 a month
- a 50 year old will pay $129 a month
- a 55 year old will pay $167 a month
- A 40-year-old man claiming a monthly benefit of $3,300 will pay $61 a month.
- a 40-year-old woman who gets the same coverage will pay $80 a month.
- a paramedical exam, similar to a physical, performed by an independent third party
- measurement of height, weight, body mass, pulse and blood pressure
- blood and urine collection
- family medical history
- pre-existing conditions
- medications you are taking
- if you drink or use tobacco
- industry associations
- membership organizations
- fill out an application
- go by subscription
- be approved by the insurance company
- First, this type of coverage depends on your employment or group membership. if that changes (change companies or leave an organization), you lose your coverage.
- Second, businesses and organizations renew their benefits annually, including group disability insurance. after these reviews, there is no guarantee that the plan will be renewed. Group policy sponsors can simply cancel their long-term disability insurance anytime they want. this underlines one of the main advantages of individual coverage.
- You have dependents who are financially dependent on you, such as your spouse, children, or elderly parents.
- You have debt you need to pay off, like student loans or a mortgage.
- has a well-paid job that is not easily replaceable (doctors, lawyers, and public accountants).
- You are self-employed (small business owners, independent contractors, and temporary workers).
- You have a technical job occupation that requires skills that you would not be able to perform if you were disabled.
- disabilities that occur outside of work
- disabilities that last more than a few months.
- disabilities that are severe enough to prevent you from working in your regular job, but still allow you to work in other capacities
- people who earn much more than ssdi pays in monthly benefits
If you’re lucky, a self-occupancy provision may be included in your basic cover. in other cases, it may only be available as an attachment. Because of how broad this definition of disability is, some insurance companies will not make it available to certain professions.
A modified own occupation defines disability as the inability to perform any work. How it is different from any occupation is that you will receive benefits if you choose not to work. An any occupation policy will deny claims if you are deemed able to work but choose not to.
The transitional self-occupation definition of disability is similar to self-occupation coverage. the difference is how benefits are affected if you work in another occupation after an injury or illness. A transitional self-occupancy policy limits your benefits based on the difference between the full amount of your disability benefit and your post-disability earnings.
long-term disability benefits
Many private long-term disability insurance policies include optional benefits and features called riders. think of these as add-ons or extras that can enhance your coverage. riders help you customize a policy to fit your needs and preferences. however, it is important to remember that they are added to the cost of your policy.
These are the most common riders you can expect to find when shopping for long-term disability insurance.
The residual disability rider may provide benefits if you are considered partially disabled, not totally disabled. it is designed to protect you against partial loss of income. the residual disability clause comes into play if:
Benefits are generally calculated as a percentage of your lost earnings or what you would receive if you were unable to work.
The Future Increase Rider allows you to increase the amount of your coverage on designated future dates. better yet, it allows you to do so without having to re-subscribe. Here are some typical scenarios where the future increase clause is useful:
Insurance companies understand that the amount you earn on the day your policy is issued will likely change over time. the future increase clause is designed to help policyholders update their coverage accordingly.
The Cost of Living Adjustment (Cola) Rider increases your benefit amount each year you are disabled. (And not because insurance companies love doling out money.)
This is done because your cost of living is likely to increase annually due to inflation. adding a tail clause to your policy offsets this risk.
The catastrophic disability rider can help pay for ongoing care needed due to a catastrophic illness or injury. this may apply if you suffer a complete loss of one of your senses:
Catastrophic disability can also be defined as the inability to perform at least two of the six activities of daily living without assistance. these include bathing, dressing, eating, using the bathroom, continence, and transferring.
What does long-term disability insurance not cover?
Long-term disability insurance covers a lot, but it can’t cover everything. There are almost always exclusions and coverage limitations.
To avoid confusion or surprises, exclusions and limitations will be included in your policy contract. The purpose of coverage exclusions is to mitigate the insurer’s risk of paying a claim resulting from high-risk conditions or activities.
Some common examples of exclusions that apply to all applicants include:
Depending on your medical subscription and lifestyle choices, you may also receive individual exclusions. For example, if you have had a herniated disc, your policy may exclude claims resulting from spinal injuries. Many policies also limit benefits if a mental illness or nervous disorder limits your ability to work.
Because they are sometimes confused, it is important to highlight the difference between long-term disability insurance and long-term care insurance. A long-term care policy will cover the costs of nursing homes, assisted living facilities, or home care if you are unable to care for yourself. however, it will not replace lost income like a long-term disability policy.
On average, you can expect the cost of long-term disability insurance to be between 1 and 4 percent of your current income. but that’s just a rough estimate.
How much you pay for long-term disability actually depends on a number of lifestyle and policy choices. That’s because insurance companies underwrite long-term disability coverage based on the risk of an applicant filing a claim, as well as for how long and how much a person could collect in benefits.
cost increases with age
The older you get, the more likely you are to experience a disabling event again. it really is that simple.
for a monthly benefit of $4,300 lasting five years:
The steady increase in premium amounts you see here is a perfect illustration of why the best time to buy long-term disability insurance is right now.
women pay more than men
Even if all other factors are equal, women can pay up to 40 percent more in premiums than men for disability insurance. That’s because women suffer from career-impacting disabilities, such as breast cancer, autoimmune disorders and depression, more than men. Women’s disability claims also tend to last longer than men’s.
For what it’s worth, the gender price gap for disability insurance is the opposite of life insurance. women live longer than men, which means they get the same preferential treatment that men get here.
the healthier you are, the better
This may be the most obvious factor of all. People in less than average health who have chronic illnesses and/or smoke are more likely to have disabilities.
When evaluating your health, disability insurance companies may request the following:
However, there are ways that applicants in good health can bypass the medical exam.
more information: disability insurance without exam
Not all job occupations are treated the same
Disability insurance is designed to protect your income, so it should come as no surprise that your career has a big impact on your premium rate. Insurance companies classify jobs based on job hazards, as some are more prone to injury or illness than others.
Your occupation will also be evaluated based on the difficulty of returning to work after an injury or illness. The more difficult it is to perform a job with certain injuries or illnesses, the more likely the insurance company will have to pay in benefits.
Job occupations are grouped into specific risk classes, which are numbered on a scale of 1 to 5 or 6. Generally, the higher the number, the less risk an insurer considers for that profession. the lower the risk, the lower the premium rate.
When comparing policies, you should keep in mind that insurers assign different classes of risk to the same profession. one insurer may designate a job as a 4, while another may classify it as a 5.
the more you earn, the more there is to insure
Disability insurance benefits are based on a percentage of your income. therefore, a key part of the underwriting process and a determining factor of your premium is how much you earn. this is done through financial subscription.
For subscription purposes, income is earned if stopped or reduced by a disability. investment or business income that does not require work on your part will not be taken into account in your financial subscription.
subscribers will evaluate their salary, wages, regular overtime, bonuses and commissions. they can consider contributions to your retirement plan made by your employer. if you own a business, the insurer will consider your share of the profits from the business.
your policy choices matter too
So far, we’ve highlighted the personal factors that influence the cost of long-term disability insurance. however, there are also several policy options that will influence how much you pay in monthly premiums.
The benefit period you select is a good example. The longer your benefit period, the more you can expect to pay in premiums. Most of the time, the length of the most profitable benefit period is 5 years.
Your elimination period, or waiting period, is another example of a policy choice that affects the cost of long-term disability insurance. the elimination period for disability insurance is similar to the homeowner’s insurance deductible. it is the part you pay out of pocket before benefits kick in. the cost is opposite of your benefit period: the longer your waiting period, the less you pay in premiums.
Elimination periods for long-term disability can be as little as 30 days or as long as a year. the standard duration is 60 or 90 days.
More information: How much does disability insurance cost?
All long-term disability insurance plans are backed by an insurance company in one way or another. however, there are several ways to do it.
For example, a common way is to sign up for group coverage. this is most commonly done through an employer. You can also find group coverage through:
Many employers offer group disability insurance coverage to their employees as a workplace benefit. in fact, employers often pay some or even all of the cost of the premium.
Another option is to purchase your own personal policy. You can do this through an insurance agent or directly from a reputable insurance company that offers individual long-term coverage.
individual versus group coverage
The main difference between individual long-term disability and group long-term disability is cost. Participating in a group plan is often cheaper than buying an individual policy. (think of it like buying in bulk). this is especially true if the group plan sponsor offers to pay some or all of the cost of the policy.
Another key difference is that group disability plans are guaranteed issue. This means that if you apply for coverage, you are automatically enrolled without having to go through the enrollment process. insurance companies are able to do this because they spread their risk across a large group of policyholders.
On the other hand, purchasing individual long-term disability insurance will require that you:
and for good reason. With an individual policy, the insurance company has to assess the risk of a single applicant. if the company considers you high risk, you will pay more in premiums. an insurer may consider someone so risky that they deny coverage altogether.
Although this process may seem like a disadvantage to individual coverage, it pales in comparison to the disadvantages of group coverage.
The biggest downside to a group policy is that you can lose coverage in two ways that are mostly out of your control.
When you buy an individual policy, you own it as long as you pay the premium. you control your own destiny.
what’s even better is that the amount you pay is usually locked. it won’t change unless you opt for more coverage.
individual plans are also portable. you don’t lose coverage because you change jobs, lose your job, or cancel a group membership.
If you earn income, you should seriously consider purchasing a long-term disability insurance plan. this is especially true in the following circumstances:
There are other types of coverage to help people during periods of disability, such as short-term disability insurance, workers’ compensation insurance, and social security disability insurance (ssdi). however, only long-term disability insurance will cover the following circumstances:
It’s pretty clear why long-term disability insurance is such a valuable component of your financial safety net. but is it really worth the cost?
A serious accident or injury can happen anytime, anywhere. if you wait until you become disabled, it will be too late to get coverage. therefore, the worst thing you can do is assume “it can’t happen to me”.
In addition, launching a plan today carries a significant financial incentive. Like almost any other type of insurance, long-term disability coverage only gets more expensive with age. so it makes sense to set a lower rate at an early age.
Ultimately, deciding whether or not to insure your income is as important a decision as any, and it’s entirely up to you.
The information and content provided in this document is for educational purposes only and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. brisa does not guarantee the accuracy, completeness, reliability, or usefulness of any testimonials, opinions, advice, product or service offerings, or other information provided here by third parties. individuals are encouraged to seek the advice of their own tax or legal advisor.