Long term disability insurance guide

When it comes to income protection, long term disability insurance is the most valuable form of coverage your money can buy in 2019.
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14 mins

Most people select a career path they can see themselves in for the long haul.

So it makes sense to put a disability income insurance plan in place that will protect your paycheck every step of the way, right?

In this comprehensive guide, we cover everything you need to know about long term disability insurance, including:

Read on to learn more!

What is long term disability insurance?

Long term disability insurance is a form of income protection that is designed to covers serious ailments that may last several months or even years. Permanent disabilities are also covered by long-term disability insurance.

With long term disability coverage, you can select how long you want to receive benefits if you experience a disabling event. Typically, you may choose a benefit period of five years, 10 years or longer. You might also choose to receive benefits up to a certain age, such as 65 or 67.

Who should buy long term disability insurance?

If you earn an income, you should strongly consider purchasing a long term disability policy. This is especially true if you have any of the following:

  • Dependents that rely on your income.
  • Debt that you need to pay off, like student loans.
  • A high-paying job occupation that is not easily replaceable.
  • A technical job occupation requiring skills that couldn't be performed if disabled.

Other types of coverage exist to help people through periods of disability, such as short term disability insurance, workers compensation insurance and Social Security Disability. However, only long term disability insurance will cover the following circumstances:

  • Disabilities that occur outside of work.
  • Disabilities that last longer than a few months.
  • Disabilities that are serious enough to prevent you from working your regular job, but still allow you to work in other capacities.
  • Individuals who earn well above what Social Security Disability pays in monthly benefits.

That being said, it's pretty clear why long term disability insurance is such a valuable component of your financial safety net.

When should I buy long-term disability insurance?

Frankly, the best time to buy long-term disability insurance is right now. And we're not just saying that because we're an insurance company.

A serious accident or injury can occur at any time. If you wait until you become disabled, it will be too late to get covered. That's why the worst thing you can do is assume "it can't happen to me."

Furthermore, putting a plan in place in place today comes with a serious financial incentive. Like just about any other type of insurance, long term disability coverage only gets more expensive with age. The younger you are, the lower your monthly premium rates will be, period.

Simply put, older people are more likely to suffer an injury or illness that qualifies as a disability. This places older individuals at a higher risk of claiming benefits, which is why insurance companies charge more as people age.

Where can I buy long-term disability insurance?

Of course, all long term disability insurance plans come from an insurance company in some way or another. However, there are various ways you can go about doing so.

For example, one common way is to sign up for group coverage. This is most commonly done through an employer. You may also find group coverage through:

  • Unions.
  • Industry associations.
  • Membership organizations.

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 premium cost.

Another option is to buy 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 coverage vs. group coverage

As you can probably imagine, there are a number of differences between individual disability insurance and group disability insurance.

The main difference is cost. Participating in a group plan is typically cheaper than buying an individual policy. (Think of it as buying in bulk.) This is especially true if the sponsor of the group plan some or all of the policy cost as previously mentioned.

Another key difference is that group disability plans are guaranteed issue. This means if you apply for coverage, you are automatically enrolled without having to go through the underwriting process. Insurance companies can do this because they spread their risk among a large group of policyholders.

On the other hand, buying an individual long term disability plan will require you to:

  • Submit an application.
  • Pass through underwriting.
  • Be approved by the insurance carrier.

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 premium. It’s possible for an insurer to consider somebody so risky that they deny coverage altogether.

Although this process may seem like a downside to individual coverage, it's pales in comparison to cons of group coverage.

Above all, the biggest downside of group policy is that it’s possible to lose coverage in two ways that are mostly out of your control.

First, this type of coverage is contingent on your employment or group membership. If that changes (you switch companies or leave an organization), you lose your coverage.

Second, companies and organizations conduct annual renewals of their benefits, including group disability insurance. Upon these reviews, there is no guarantee the plan will be renewed. Group policy sponsors can simply cancel their long-term disability insurance anytime they please. This underscores one the primary advantage of individual coverage.

When you buy an individual policy, you own it for as long as you pay the premium. You control your own destiny.

What's even better is the amount you pay is generally locked in. It will not change unless you opt for more coverage.

Individual plans are also portable. You don’t lose coverage by changing jobs, losing your employment, or cancelling a group membership.

How does long-term disability insurance work?

So far, we've covered the fundamentals of long term disability insurance. Now, let's dive deeper into how long term disability actually works.

In exchange for the monthly premium payments you make, the insurance company agrees to pay you contracted benefits if you suffer a disability that affects your ability to work. The benefits replace a significant portion of your lost income.

Each disability insurance policy spells out:

  • How much you will pay in premium. This is the monthly cost you must pay as a policyholder to keep your coverage intact.
  • How the policy defines disability. Some policies will pay out 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 you are able to work in another type of profession, even if you earn less money.
  • The amount of your benefit. In most cases your benefit amount will be a percentage of your income.
  • How long your benefits will last. The benefit period may be a certain number of months or years, or up to a certain age.

How much does long-term disability insurance cost?

In general, long term disability insurance premiums will cost between 1 percent and 4 percent of your current income. What you pay is based on the likelihood of you filing a claim. With disability insurance, there are a number of factors carriers use to determine your risk level. (More on that in a little bit!)

How much of my income will long-term disability insurance cover?

The size of your disability insurance benefit will depend on the policy. In general, long-term disability policies replace between 60 percent to 80 percent of your income.

In addition, many policies replace income lost in the event you have to take a lower-paying job due to an injury or illness.

What determines the cost of long-term disability insurance?

As you know by now, insurance companies underwrite disability coverage based on the risk of an applicant filing a claim. They also consider how long and how much a person might collect in benefits.

But what factors do carriers look at to determine an applicant's level of risk? Take a closer look right here:

Age

It's no secret that older individuals present greater risk to insurance companies. They file disability claims at a greater rate than people who are younger. It's really that simple.

For a $4,300 monthly benefit that lasts five years:

  • 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.

The steady climb in premium amounts you see here is a perfect illustration of why the best time to buy disability insurance is right now.

Gender

Even with all other factors being equal, women can pay up to 40 percent more in premiums than men for disability insurance. That’s because women suffer disabilities that impact their careers, such as breast cancer, auto immune disorders, and depression, more than men. Disability claims for women also typically last longer than those for men.

For example:

  • A 40-year-old male applying a $3,300 monthly benefit will pay $61 a month.
  • A 40-year-old woman getting the same coverage will pay $80 a month.

For what it's worth, the gender price gap for disability insurance is the opposite for life insurance. Women consistently live longer than men, which means they get the same preferential treatment you see men getting here.

Health

This may be the most obvious factor of all. People in less-than-average health who have chronic conditions and/or use tobacco are more likely to suffer disabilities.

When assessing your health, disability insurance companies may request the following:

  • A paramedical exam, similar to a physical checkup, conducted by an independent third party.
  • Measurement of height, weight, body mass, pulse and blood pressure.
  • Collection of blood and urine.
  • Family medical history.
  • Pre-existing conditions.
  • Medications you’re taking.
  • Whether you drink or use tobacco.

However, there are ways for applicants in great health to bypass the medical exam.

Learn more about no exam disability insurance here.

Job

Considering disability insurance is specifically for your income, it should comes as no surprise that your career will have a major impact on your premium rate. Insurance companies classify jobs based on the hazards of the work, as some are more prone to injury or illness than others.

Your occupation will also be assessed based on the difficulty of returning to work following an injury or illness. The more difficult it is to perform a job with certain injuries or illnesses, the more the insurance company will likely 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. Typically, the higher the number, the less risk an insurer considers that profession. The lower the risk, the lower the premium rate.

When you compare policies, you should note that insurers assign different risk classes to the same profession. One insurer may designate a job as a 4, while another may classify it a 5.

Income

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 underwriting.

For underwriting purposes, income is earned if a disability would stop or reduce it. Investment or business income that doesn’t require work on your part will not be factored into your financial underwriting.

Underwriters will assess your salary, wages, regular overtime, bonus and commissions. They may consider contributions to your retirement plan made by your employer. If you own a business, the underwriter will consider your share of the business’s earnings.

Benefit period

Until now, we've highlighted the personal factors that influence the cost of disability insurance. However, there are also various policy choices that will influence how much you pay in monthly premiums.

For starters, you can choose your benefit period. This is how long the policy will pay you benefits for if you become disabled. The longer your benefit period is, the more you can expect to pay in premium.

More often than not, the most cost-effective benefit period length is 5 years.

Elimination period

Every long term disability insurance policy will also include an elimination period, also known as a waiting period. This is the period of time between when a disability occurs and when benefits begin to be paid.

The elimination period for disability insurance is similar to the deductible on property insurance. It’s the part you pay out-of-pocket before benefits kick in. Cost runs the opposite of your benefit period: The longer your waiting period is, the less you will pay in premium.

Elimination periods for long term disability can be as little as 30 days or as long as a year. The standard length is 60 or 90 days.

Learn more about the cost of disability insurance here.

When can I collect long term disability benefits?

While it may just feel like semantics, 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, you collect benefits following an injury or illness.

A policy’s definition of disability is based on your capacity to work. Maybe you’re unable to work in your chosen profession, but can do other work. A disability may allow you to work in a reduced capacity. Serious ailments can prevent you from working in any job.

To collect on a claim, you must meet the policy’s definition of disability. This can vary greatly by company and policy. The broader the definition, the more insurance will cost.

Understanding the definition of disability

Long term disability insurance policies will typically define disability in one of the following four ways:

  • Any occupation.
  • Own occupation.
  • Modified own occupation.
  • Transitional own occupation.

Let's break down each definition.

Any occupation

The any occupation definition of disability means you are ineligible for benefits if you can work any other job. This is true even if the jobs you are able to perform with a disability pay much less than what you earned prior to becoming disabled.

Any occupation is the strictest definition of disability a policy can have. An any occupation policy will typically require the lowest premiums. But it will also result in the least amount of coverage.

Own occupation

The opposite of the any occupation definition is own occupation. A policy with an own occupation definition of disability protects your ability to work in your given profession.

You will be covered if a disability prevents or limits you from working the job you had when you became disabled. Even if you’re able to work in another capacity, you will still be eligible for benefits. You may also collect benefits on an own-occupation policy if:

  • You have to work less hours because of a disability.
  • There are some tasks of your job you can’t perform.

If you're lucky, an own occupation provision may be included in your base coverage. In other cases, it may only be available as a rider. Because of how wide this definition of disability is, some insurance companies will not make it available to certain professions.

Modified own occupation

A modified own occupation defines disability as the inability to perform any job. How it differs 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 capable of working, but choose not to.

Transitional own occupation

This definition of disability is similar to own occupation coverage. The difference lies in how benefits are impacted if you work in another occupation following an injury or illness. A transitional own occupation policy limits your benefits based on the difference between your total disability benefit amount and post-disability income.

What other benefits are included in a long term disability insurance policy?

Many long term disability insurance policies include optional 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's important to remember that they add to the cost of your policy.

Here are the most common riders you can expect to come across when shopping for long term disability insurance.

Residual disability rider

This rider may provide benefits if you considered partially disabled, not totally disabled. It is designed to protect you against partial income loss. The residual disability rider comes into play if:

  • You are able to perform some, but not all, of the material duties of your occupation.
  • You are unable to work for a set percentage of time.

Benefits are typically calculated as a percentage of your loss of earnings or what you would receive if you were unable to work.

Future increase rider

This rider allows you to increase your coverage amount at designated future dates. Better yet, it enables you to do so without going through underwriting again. Here are some typical scenarios where the future increase rider comes in handy:

  • Reaching a certain age.
  • Following a major life event.
  • Your annual income increases.
  • You lose access to group coverage.

Insurance companies understand that the amount you earn the day of you policy issuance will likely change over time. The future increase rider is designed to help policyholders update their coverage accordingly.

Cost-of-living adjustment rider

The cost-of-living adjustment (COLA) rider increases your benefit amount each year that you are disabled. (And not because insurance companies love handing out money.)

This is done because your cost of living will likely increase annually due to inflation. Adding a COLA rider to your policy offsets this risk.

Catastrophic disability rider

This rider can help pay for ongoing care needed due to a catastrophic injury or illness. This can apply if you suffer a complete loss of one of your senses:

  • Speech.
  • Hearing in both ears.
  • Sight in both eyes.
  • Use of both hands.
  • Use of both feet.
  • Use of one hand and one foot.

Catastrophic disability can also be defined as being unable to perform at least two of the six activities of daily living without assistance. These include bathing, dressing, eating, using the restroom, continence and transferring.

What won't long-term disability insurance cover?

At this point, it may seem like long term disability insurance covers just about everything under the sun. However, there are almost always coverage exclusions.

To avoid confusion, these exclusions will be listed in your policy contract. The purpose of coverage exclusions is to mitigate the insurance carrier's risk of paying a claim resulting from high-risk conditions or activities.

Some common examples of exclusions that apply to all applicants include:

  • Self-inflicted acts.
  • Criminal activities.
  • Acts of war.
  • Civil disobedience or rebellion.
  • Operating a motor vehicle while intoxicated./

Depending on your medical underwriting and lifestyle choices, you maty 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.