Should I consider long term disability insurance?

Most people don’t question the need for life insurance. If you die, it will provide your survivors with a payout to help replace the income you would have earned. But what would happen if an illness or injury left you alive but unable to work? In that case, you may want to be covered by long term disability insurance, which can help to replace the lost income.

Like life insurance, long term disability insurance (also called LTD) helps provide financial protection for you and your family. But instead of a single payout, it provides monthly payments while you're unable to earn income due to illness or injury. Many professionals consider it almost as important as life and health insurance — a “consideration” for anyone who works for a living, especially if they have dependents. So why not take a minute to learn more, including:

• 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?

What are the chances that any one individual will lose the ability to work for an extended period? The short answer is, greater than you might think. In fact:

• Just under 1 in 4 of today's 20-year-olds will miss at least one year of work due to disability before they retire.¹

• 1 in 8 workers will experience a long-term disability that lasts longer than five years.²

• The most common reasons for long-term disability claims are musculoskeletal disorders, injuries such as fractures, sprains, and strains of muscles and ligaments, cancer, mental health issues, and circulatory issues (heart attack, stroke).³

Yet despite the relatively high risk of disability, it’s estimated that 65% of private-sector workers have no long-term disability insurance.²

Five situations where long term disability makes sense

1. You have family members who depend on your income

Many people who purchase LTD coverage are concerned about supporting their dependent children, but it can also be important for other people who depend on your income, including yourself. For example, if you’re married without children but earn more than your spouse, you should consider getting coverage. If you’re supporting parents or other elder 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 employee benefits provided by larger organizations. If you become disabled, LTD can help you meet your ongoing financial obligations.

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 away your ability to practice? How would it impact your earning potential? For example, a surgeon with arthritis might be able to perform other medical work, but would likely earn less if they couldn’t 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.

4. You can get coverage at work

If your employer offers long term disability coverage at work or through an association, you may be able to enjoy more affordable rates and a less rigorous approval process.

5. You don’t have reserve assets or other sources of support

Do you have significant assets to tap into — or someone you can rely on for support— in the event of a disability that prevents you from working? If not, you may want to consider LTD.

Simply put, long-term disability (LTD) insurance is often most beneficial for people who rely primarily on their earned income to support themselves and their dependents, and who lack savings or other means to cover expenses if they are unable to work.

How long term disability policies work

LTD benefits will replace a portion of your income (for example, 60% of your pre-tax monthly income*) if you're unable to work for one or more years due to illness or injury. That's why many experts call it disability income insurance. You can use long term disability benefits just as you would use your normal income, for anything you require, including:

• Mortgage

• Utilities

• Credit card payments

• Auto loans

• Personal loans

• Medical bills

• Health insurance premiums

• Retirement contributions

• Student loans

• College or childcare

• Groceries or dining out

• Even vacations and entertainment

Long term disability coverage shouldn’t be confused with short term disability insurance (also called STD), which employers often provide as a mandatory or voluntary benefit. STD is only for temporary disabilities, typically replacing a portion of your income for 3-6 months or until you can get back to work.

LTD is similar in that it's designed to replace your income, but for long term and 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 defines the following items:

• The benefit: The amount of money you can get each month you’re out of work.

• 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.

• The definition of disability: Every disability policy has a specific definition of what it means to be disabled. The definition will fall into one of two categories:

  • An any-occupation definition means that you’ll only qualify for benefits if you can’t do any work at all.

  • An own-occupation definition means that you’ll qualify for benefits if you can’t work in your specialty or field. If your earning potential would be severely impacted by a disability that lets you do some work but leaves you unable to practice your area of expertise, consider choosing an own-occupation policy.

What to look for in an LTD policy

The first question people considering LTD typically ask is, "How much should I get?” The short answer is: A well-designed policy will potentially replace 60%-80% of your earnings.

But the amount of coverage is just one consideration. 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 accompanies 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.

• 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 funds to help pay 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 if you are functionally impaired or irrevocably disabled. In certain cases, it may provide up to 100% income replacement (although for high income earners replacement levels will likely be lower).

Most of these 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.

How much does LTD cost?

Experts say you should expect to pay between 1% and 3% of your annual income for an LTD plan.⁹ The higher the benefit amount and the longer the benefit period, the more you’ll pay. An own-occupation policy will cost more than an any-occupation policy, and riders will typically add to the cost. Since your age and health status affect your risk of disability, these factors will affect premium costs as well. Note that there are also ways to control costs, such as opting for a longer waiting period.

Two ways to get a long term disability 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 LTD through a professional association. Either way, group plans can be an excellent choice, as the premiums are typically lower than for an individual policy. In some cases, the employer pays a portion of the premium, further lowering your cost. Plus, if you pay your share with after-tax dollars, your benefits may be tax-free. But keep in mind that if you leave the company or association, you may lose your coverage.

2. Individual disability insurance

This is a policy you purchase for yourself so that you can tailor it to your needs. It's typically purchased directly from an insurance company or through a financial representative.

Potential Disadvantages of LTD insurance

In general, LTD insurance is a valuable tool that can protect you and your dependents financially in the event of a serious or permanent disability. But there are some potential issues that you should be aware of:

• After two years on long-term disability, many policies shift from covering the inability to perform your “own occupation” to requiring proof that you are unable to work in “any occupation.” This means benefits may be reassessed and discontinued if you are determined capable of working in another role, even if it pays less or differs from your previous job.¹⁰

• LTD insurance can be expensive, especially for older individuals or those in high-risk jobs

• Policies may exclude coverage for pre-existing conditions or limit benefits for certain illnesses, reducing the protection you actually receive.

• LTD typically has a waiting (or “elimination”) period before benefits begin, requiring you to use personal savings or other income sources in the meantime.

• Group LTD plans offered through employers often end if you leave or lose your job

• LTD benefits may be taxable if you purchase coverage with pre-tax dollars, reducing your net benefit

• If you never experience a qualifying disability, the money paid in premiums is not returned

Alternatives to long term disability insurance

1. Social Security Disability Insurance (SSDI)

SSDI is a government-sponsored disability insurance program included in your Social Security benefits. Here’s what you should know:

• 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 after you make your first premium payment.

• There are other limitations to SSDI: 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 25% of claims are approved.⁸ While an initial rejection can be appealed, the process can stretch for years.

Finally, if your claim is accepted, you'll find that the average monthly benefit is under $1,600⁹. Since that's not enough to cover living expenses for most people, professionals 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 STD typically has a shorter elimination period (waiting period) and allows you to receive benefits while waiting for your LTD benefits to start. And by making it easier to opt for a longer elimination period in your LTD policy, STD coverage can also help reduce your LTD premiums.

3. Accident insurance and critical illness plans

This coverage typically provides a lump sum payment 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 beneficial, these plans don't protect you with ongoing income payments 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.

How alternatives to LTD insurance compare