Do I need long term disability insurance?
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Most people don’t question the need for life insurance: if you die and can’t provide for your family, it can provide you with a large payout to help replace the lost income you would have otherwise earned. But what would happen if a lasting illness or injury kept you from earning income?
Long term disability insurance (also called LTD) can provide the same kind of financial protection for your family's finances – but instead of a single payout, it provides monthly payments while you can't earn income due to illness or injury. How big is the risk of disability? What can you do about it? This article will tell you about the following:
When is long term disability insurance worth it?
How LTD coverage works
Ways to get LTD coverage and alternatives to consider
When is long term disability insurance worth having?
If you think about it, the most valuable “asset” that you possess probably isn’t your car or home – it’s your ability to work and earn an income. In fact, if you lose that ability for an extended period, your other assets – and lifestyle – would probably be at risk too. That possibility is greater than most people think.
1:4 of today’s 20-year-olds will miss at least one year of work due to disability before they retire.1
1:8 workers will experience a long-term disability that lasts longer than five years.2
Over 80% of long-term disabilities are caused by illnesses such as cancer, heart disease, arthritis, multiple sclerosis, and lupus.3
Five situations where long term disability makes sense
1. You have family members who depend on your income
A lot of people who purchase LTD coverage are concerned about supporting their dependent children, but it can be important for other people who depend on your income as well. For example, if you’re married without children but earn more than your spouse, you should consider getting coverage to help maintain your lifestyle if you can’t work due to disability. If you’re helping to support elder parents or other relatives, LTD benefits can help you maintain that support.
2. You’re self-employed or a small business owner
As an entrepreneur or self-employed individual, you may not have the safety net of employee benefits provided by larger organizations. If you become disabled, your ability to generate income may be severely impacted. Long-term disability insurance benefits can help you meet ongoing financial obligations and continue supporting your family.
3. You’re a professional with specialized skills
If you’re a highly-compensated professional with unique skills – such as a surgeon, dentist, or trial lawyer – what would happen if a disability took your ability to practice your specialty away from you? How would it impact your earning potential? For example, a surgeon with arthritis might be able to perform other medical work, but they would likely earn less than when they could use their hands to perform surgery. Certain kinds of LTD insurance, known as own-occupation policies, pay benefits if you suffer a disability that prevents you from practicing your specialized profession, even if you can do other work. That kind of protection can help maintain your standard of living and meet financial commitments, even if you can no longer work in your chosen field.
4. You can get coverage at work
If your employer offers long term disability coverage at work or through an association, you may benefit from attractive group rates – and the underwriting (approval) process will likely be simpler than it would be for an individual policy. When offered, it’s typically available as a voluntary (i.e., optional) employee-paid benefit that you sign up for during open enrollment. But since group coverage rates tend to be more affordable than individual rates, it can make the valuable protections of long-term disability insurance much easier to obtain.
5. You don’t have reserve assets or other sources of support
Whether inherited or built up over the years, some people have significant assets – such as liquid investments or marketable real estate – that they can tap into in the event of a disability that prevents them from working. However, if you don't have such resources or another person that you can rely on for support, then you should consider getting LTD coverage to protect your income.
How long term disability policies work
LTD doesn't insure disability – it insures your income. The benefits are designed to replace a portion of your earnings (for example, 60% of your pre-tax monthly income*) if you're unable to work for many years 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 you can use long term disability benefits for anything you require, including:
Mortgage
Utilities
Credit card payments
Auto loans
Personal loans
Medical bills
Health insurance
Retirement contributions
Student loans
College or childcare
Groceries or dining out
Even vacations and entertainment
More on why you need disability insurance.
Long term disability coverage shouldn’t be confused with short term disability insurance (also called STD), which is often provided by employers as a mandatory or voluntary benefit. STD typically has a much shorter elimination period and is only for temporary disabilities, typically replacing up to 60%-80% of your income for 3-6 months (and rarely more than a year) or until you can get back to work.
LTD is similar in that it's designed to replace your income, 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 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 90 days to a year – and if you don't have a 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.
Other 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.
How much coverage do you need?
People commonly ask, "How much should I get?” A well-designed policy will potentially 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 that 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.4
Student loan protection rider: This optional benefit provides additional money to make student loan payments during the benefit period. It is beneficial for early-career professionals such as doctors and lawyers who have invested heavily in their education.5
Future purchase option: This lets you increase coverage in the future as your income rises, without having to provide medical proof of insurability.6
Retirement protection: A rider that protects retirement savings by replacing the contributions you would have made to your defined contribution plan while totally disabled.7
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, and the leading carriers will allow you to personalize your policy in other ways as well. For example, Guardian offers all the optional riders described above and others -- including 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.
How to get a long term disability policy
There are two basic ways to get a long term disability insurance policy.
1. Group disability insurance through your work or an association
Your company may offer an LTD plan as part of your employee benefits package. Or, if you're self-employed, you may be able to get disability insurance through a professional association. Either way, group plans can be an excellent choice: The premium is typically lower than for an individual policy because the company or association is buying for a large group of people. In addition, your HR department (or the association's management) will likely have more expertise and leverage than an individual would to negotiate favorable terms.
Some employers may also subsidize a portion of the premiums, further lowering your cost. But keep in mind that when premiums are paid with after-tax dollars (which is common), then any benefit you receive down the road will typically not be taxed. However, if your employer pays for your coverage with pre-tax dollars, the benefits will be taxable. Finally, if you leave the company or association, you'll also lose your coverage in most cases.
2. Individual disability insurance
This is a policy you purchase for yourself, so you can tailor it to your needs. As it is paid for with after-tax dollars, the replacement income it provides is also tax-free. It's typically bought through a financial representative; if you don't have one, or if that person doesn't have a lot of experience with disability insurance, a Guardian financial professional can give you a disability insurance quote.
Alternatives to LTD coverage
1. Social Security Disability Insurance (SSDI)
SSDI is a government-sponsored disability insurance program included in your Social Security benefits. However, paying Social Security taxes doesn't automatically qualify you for coverage: you also have to earn a sufficient number of work credits based on your total yearly income, and it typically takes 10 years to qualify. By comparison, with an LTD policy from a private insurance company, you are eligible for benefits when you make your first premium payment.
There are other limitations to SSDI as well. The program has a strict any-occupation definition of disability covering a limited set of severe medical conditions listed in the Social Security Administration Blue Book, and benefits are only paid 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 stringent: The initial application requires extensive documentation and can take months to complete – and just 35% of claims are approved.8 While an initial rejection can be appealed, the process can stretch for years. If your claim is accepted, you'll find that the average monthly benefit is slightly over $1,000.8. Since that's not enough to cover living expenses for most people, experts say you shouldn't rely on SSDI alone for disability insurance protection.
2. 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 because it's a way to receive benefits 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.
3. Accident insurance and critical illness plans
This coverage typically provides a cash payment instead of 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.
4. 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.
Unsure if long term disability is worth it for you? Consider talking to an expert.
If you're attracted to the protection of an LTD policy but are unsure about the cost, try speaking with a financial advisor or broker 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 possible about your financial situation and concerns so that they 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.