Do I need long term disability insurance?

Long term disability insurance (also called LTD) provides the same kind of financial protection for people who can’t provide for their families – but instead of a single payout, it provides monthly income while you can’t work due to illness or injury. How big is the risk of disability? What can you do about it? This article will tell you about:

• Why you should have long term disability insurance
• How LTD coverage works
• Alternatives to LTD coverage

Take a moment to think about your most important financial assets.  People typically list things like homes, cars, and investments – but if you think about it, your ability to work and earn an income is likely the most valuable “asset” that you possess. If you lose the ability to work for an extended period, your other assets would probably be at risk too. For that matter, could you even maintain your current lifestyle if you lost your ability to work and earn income? That possibility is greater than most people think.

LTD isn't insurance for disability – it replaces a portion of lost earnings for many years if you’re unable to work due to illness or injury. That’s why many experts call it disability income insurance. The best LTD plans are a powerful defense against disruption to your way of life because the benefits you receive can be used for anything you require, including:

• Mortgage
• Utilities
• Credit card payments
• Auto loans 
• Personal loans 
• Retirement contributions
• Student loans 
• College or childcare 
• Groceries or dining out
• Even vacations and entertainment

More on why you need disability insurance.

Many people are familiar with short term disability insurance (also called STD) that is often provided by their employer, either as a mandatory or voluntary benefit. STD is for temporary disabilities, typically replacing up to 60%-80% of your income for 3-6 months (and almost never more than a year) or until you can get back to work. 
    
LTD is in many ways similar, but it is for longer term and even permanent disabilities. Sometimes coverage is offered as a workplace benefit, but it is frequently purchased as an individual policy. LTD plans are designed to provide a lasting source of income – through retirement if needed – and each policy is a legally binding contract with an insurance company that defines the following items:

• The benefit: The amount of money you can get each month that you can’t work if you qualify for benefits. 
• The benefit period: The length of time you can receive payments. Depending on the specific LTD policy, it could range from 24 months to retirement age (unless you recover from your disability earlier).
• The waiting period: Also called an elimination period, it’s the amount of time after you are disabled until you are eligible to start receiving payments. It typically ranges from six months to a year – and if you don’t have short term disability, you will need to have enough savings to tide you over.
• The definition of disability: Every disability policy has a specific definition of what it means to be disabled in order to qualify for benefits. In an LTD policy, the definition of disability will fall into one of two categories: 
  • An own-occupation definition means you qualify if you can’t work in your specialty or field.
  • An any-occupation definition means you only qualify if you can’t do any work at all.
  • In addition, different levels of disability may also be defined (for example, “partial disability”), which can qualify you for a percentage of your total benefit amount.

The distinction between any-occupation policies and own-occupation policies is critical, especially for high-earning professionals. A surgeon who loses part of a finger in a car accident might never again perform surgery. A trial attorney whose vocal cords are damaged by throat cancer might not be able to argue a case in court or perform other substantial duties. A professional’s earning potential can be severely impacted by disabilities that make them unable to perform the things they do best, even if they are still physically able to do other work –which is why they tend to choose own-occupation LTD policies.
    
People commonly ask, “How much should I get?” A well-designed policy will generally replace 60%-80% of your earnings. When you shop for an individual disability insurance policy, you’ll find that insurance companies have one or more base contracts with a standard set of features and provisions. Your contract should be tailored to the benefit amount, benefit period, and definition of disability you choose, then further customized to your needs with riders (optional provisions). Some of the provisions, features, and riders to consider include:

• Non-cancelable provision: This states that the insurer cannot raise your premiums, assuming you keep paying them. Typically goes with a guaranteed renewability provision.
• Guaranteed renewability: A provision which states that the insurance company will not cancel your policy or change the terms and features if premiums continue to be paid – but they can raise your premiums (unless the policy is also non-cancelable).
• Waiver of premium: This means that premiums are waived while you are disabled and receiving benefits. Guardian goes a step further by offering a plan that waives premiums for an additional six months after you recover and benefits end. 
• Basic or enhanced partial disability benefit rider: These options protect you by paying a partial benefit if you suffer an injury or illness that limits your ability to work but doesn’t cause total disability.
• Cost-of-living adjustment (COLA): A rider that states the insurance company will increase your benefit while on claim to account for inflation.⁵
• Student loan protection rider: This optional benefit provides additional money to make student loan payments during the benefit period. It is particularly useful for early-career professionals such as doctors and lawyers who have invested heavily in their education.⁶
• Future purchase option: This lets you increase coverage in the future as your income rises, without having to undergo a medical exam or provide proof of insurability.⁷
• Retirement Protection: A rider that protects retirement savings by replacing the contributions you would have made to your defined contribution plan while totally disabled.⁸
• Catastrophic Disability Benefits: Provides additional funds – up to 100% income replacement – if you are functionally impaired or irrevocably disabled.

Most of the above features are available in some form from a variety of disability providers. Major carriers will allow you to personalize your policy in other ways as well. For example, Guardian offers the optional riders featured here, as well as others such as a rider to waive premiums while unemployed. 

How much does LTD cost?

Experts say you should expect to pay anywhere from 1% to 3% of your annual income for an LTD plan.⁹ You should obviously expect to pay more for a higher benefit amount and a longer benefit period. An own-occupation policy will cost more than an any-occupation policy, and riders also add to the cost, albeit incrementally. Since your age and health status affect your risk of disability, these impact premium costs as well. However, there are ways to control costs, for example, by opting for a longer elimination period. Also, since the benefit of an individual LTD plan typically isn’t taxed (unless it was paid for with pre-tax dollars), you may be able to opt for a lower benefit amount.

Social Security Disability Insurance (SSDI)

SSDI is a government-sponsored disability insurance program that is included in your Social Security benefits. However, it has a number of limitations, starting with the fact that paying Social Security taxes doesn’t automatically qualify you for coverage. You also have to earn a sufficient number of work credits, which are based on your total yearly income. Forty credits are needed to qualify, but you can only earn up to four credits each year, so generally speaking, it takes 10 years to qualify. With an LTD policy from a private insurance company, you qualify for benefits when you make your first premium payment. 

SSDI also has a strict any-occupation definition of disability that covers a specific and limited set of severe medical conditions listed in the Social Security Administration’s Blue Book. The program only pays benefits for long-lasting or permanent medical issues that make you incapable of doing any work of any kind. The process for claiming SSDI benefits is also notably stringent: The initial application requires extensive documentation and can take months to complete – and about 2/3 of these claims are rejected. ¹⁰ While the initial decision can be appealed, the process can stretch out for quite a while. If your claim is accepted, you’ll find that the average monthly benefit is slightly over $1,000.¹⁰ Since that’s not enough for most people to live on, experts say you shouldn’t rely on SSDI alone for disability insurance protection.

Short term disability insurance

STD benefits almost never last more than a year, so this coverage shouldn’t really be considered an alternative to long term disability insurance. However, it is an excellent complement to LTD coverage if available from your employer because it can provide needed income during your LTD policy’s waiting period. And by making it easier to opt for a longer waiting period, STD coverage can also help reduce your total cost for an LTD policy.

Accident insurance and critical illness plans

This is coverage that typically provides a cash payment – as opposed to ongoing income replacement – if you suffer an accident or are diagnosed with a major health issue. The benefit is paid even if you don’t miss work and can be used for any purpose. While these payments can be very useful, these plans don’t protect you the same way an LTD policy does.

Personal savings and assets

If you have significant assets or non-retirement savings – enough to see you through to retirement – then you can effectively “self-insure” by turning those assets into a stream of income in the event of a disability.

Undecided about LTD? Consider getting a quote.

If you’re attracted to the protection of an LTD policy but are not sure about the cost, try speaking with a financial advisor or broker who is familiar with the specifics of buying an individual disability policy. If you don’t know one, a Guardian financial advisor can help you. Give your advisor as much information as you can about your financial situation and concerns so that he or she can start looking into the plans and options that best meet your needs. Discuss different coverage scenarios: What happens if you have a long-lasting illness, but ultimately recover? What if you have a physical impairment that limits your productivity? The more you explore, the more you’ll realize the value of having lasting disability protection. 

What is covered under long term disability insurance?

LTD plans cover your ability to work and earn a living. If you become disabled -- either through illness or injury -- an LTD policy can help provide the monthly income needed to care for your family and maintain your lifestyle.

When can you use long term disability insurance?

Once you are injured or diagnosed with an illness, you have to gather the appropriate documents and information then file a claim for benefits. If it fits your policy’s definition of disability, there will typically be an elimination period of six months to a year before monthly disability payments start. Payments will continue for the duration of the policy’s benefit period (typically 2, 5, or 10 years, or to retirement age).

When would you need disability insurance?

If you became disabled after a car accident and couldn’t work, how would you get income? If a diagnosis of cancer resulted in treatments that kept you from working for a year, how would you pay your bills? In these types of situations, short and long term disability coverage can work together to provide the income you depend on.