Long-Term Disability Insurance

August 31, 2020
Jonathan Fritz
B.A. Risk Management
Life Insurance Agent

What is Long-Term Disability Insurance?

Long-term disability insurance covers a portion of your income when you can't work due to an illness or injury. Policies cover a lot more than accidents. They will include situations where you might be stricken by a heart attack, cancer, or a life-changing disease such as multiple sclerosis, renal disease, diabetes, or other similar conditions.

As much as we don't like to think about it, at some point in our working careers, many of us are not going to be able to work for an extended period. You may be involved in a serious car accident, be stricken by cancer, or take a hard fall on a patch of ice and break your back.

Life-changing incidents like these are more common than you might think. For example, a Social Security Administration study indicates that one out of every four of today’s 20 year-olds will become disabled before they reach retirement age.

Also, the majority of personal bankruptcies in the United States are due to medical bills.

Life is unpredictable, and there’s simply no way to know when a disabling injury or illness will strike without warning.

In addition to dealing with your medical condition, you’re also going to have to deal with financial hardships to one degree or another. If you’re the primary breadwinner for your family, this could cause a horrible disruption that could cost everyone dearly.

As bills mount, frustration, stress, and fear will mount and make things even worse.

However, with long-term disability insurance, you can give yourself a secure financial safety net to help get you through extended periods of tough times.

The best time to buy long-term disability insurance is before you need it. That means when you’re young, have a good job, and don’t have much in the way of health issues that could raise a red flag.

It's easier to qualify when you're young, and the premiums will be cheaper starting out. Also, consider that it could be hard or even impossible to buy a policy if your health takes a dive at a later date. 

Several health plans require applicants to show "evidence of insurability," meaning you must answer a series of health-related questions before you’re approved.

If you buy a good policy, the amount should come close to your regular take-home pay.

Short-term vs. Long-term Disability Insurance

It’s essential to know about and differentiate between short- and long-term insurance. Both protect you with part of your income when you go down, but several things distinguish them from each other.

Duration. Short-term disability usually lasts 3-6 months, depending on the policy you have. Long-term disability will cover many years at a time if your disability continues or is permanent. The length of time you receive coverage is known as the benefit period. Many long-term disability policies last for 2, 5, or 10 years, or until a person retires.

Coverage. Short-term disability typically covers about 60-70% of your income. Long-term coverage may only cover as little as 40% if that’s your choice. However, most insurance agents will counsel you to buy a long-term policy that also covers 60-70% of your income.

Cost. Short-term insurance costs anywhere from 1-3% of your annual income. Long-term insurance also costs 1-3% of your yearly income but is less expensive in most cases.

Initial payout. You will typically receive your first short-term disability insurance payment about two weeks after a doctor confirms your disability. Long-term disability payouts take 3-6 months before you see any proceeds (this is known as the elimination period).

The Pros and Cons

Before you decide whether long-term disability insurance is right for you, consider some of the pros and cons:

What’s Good

  • The best thing about long-term disability insurances is that it provides a significant level of financial protection if you become disabled for six months or more.
  • There are no restrictions on how you use the money. It is treated like regular income for you to do with as you please.
  • It’s not a loan. You don’t have to pay it back or pay any interest or penalties if you use long term disability insurance.
  • It can protect you from having to dip into your retirement savings prematurely.
  • Depending on the policy you choose, protection can last a long time, all the way through to retirement age. That can make it particularly attractive in case you become disabled at a young age. You could have a policy that pays you for decades.

And What’s Not

  • You have to pay a monthly premium, possibly for a benefit you may never use. If you never become disabled, then you will have paid a lot of money and gotten nothing in return, except the peace of mind in knowing that you were protected.
  • It may not cover everything. Every policy is different. Depending on your age, profession, income, smoking history, which state you live in, the amount and duration of the policy, and your current health, you could experience limitations on coverage that could increase your risk. This is known as an exclusion and is a specific condition under which the disability payment is not paid. You may be excluded due to a pre-existing health condition or if you take part in a dangerous hobby (i.e., skydiving).
  • Pregnancy is not customarily covered a long-term policy. However, complications beyond pregnancy (i.e., you are ordered to stay at home after a C-section) could qualify for benefits if you bought the policy before you got pregnant.
  • If you earn a lot, it’s going to cost you more, because it will cost the insurer more money they will have to pay out to cover your claim.
  • The more dangerous your job is, the higher the premium will be. For example, if you're a firefighter or policeman, you will pay higher disability insurance premiums in comparison to those of an office worker. 
  • The older you are, the more expensive and less comprehensive a policy will be.
  • Pre-existing conditions may not be included. Some relatively mild health issues could lead to exclusions for other health issues.
  • It's not life insurance. This is worth noting because your family will not receive benefits if you pass away. A separate life insurance policy should complement long-term disability insurance.
  • You may find it hard to get a good policy in some situations:
    • You work in a high-risk job
    • You’re 40 or older
    • You have a history of health issues
    • You have an inconsistent income track record or income that is hard to document
    • You have irregular work and career history

Possible Alternatives to a Personal Long-Term Disability Insurance Policy

In addition to short-term disability insurance, other types of coverage can help replace income as an alternative to a personal long-term disability insurance policy.

  • Long-term disability coverage through your employer. Many workplaces offer group long-term disability insurance as an employee benefit. It's generally easy to qualify for, and your employer may offer it at no cost to you. However, if the policy isn't adequate, you may need to purchase a personal policy anyway. Also, if you move to another job, your coverage will be terminated.
  • Workers’ compensation coverage. Most employees have workers' compensation coverage through their employers. Most employers are required to provide workers' comp, but this is governed by state laws and is not uniform throughout the United States. Workers' comp also only covers injuries that take place while you're at work, and depending on coverage, may not cover all related costs. It is always wise to add a reliable long-term disability policy to augment this benefit.
  • Social Security Disability Insurance (SSDI). This can provide some coverage, but guidelines are strict, and a lot of people are rejected for coverage. You don't need to purchase a separate policy, but there's also a good chance SSDI will not cover all of your related expenses.
  • Self-insurance. This is a fancy way of saying you can always tap into your savings or checking accounts, revolving debt accounts, and your retirement savings. This is not optimal, but you'll never pay a premium if you go this route, so if you stay healthy, you could save a lot of money over your lifetime. This needs to be balanced against the amount of risk you're taking on by not letting someone else pay your bills for you.

You can also approach family members for support who may be willing to step in a pay your bills for you. However, this isn’t optimal either because it does put a financial burden on other relatives who are willing to accept this responsibility.