It makes sense to select a career path that allows you to do what you love.
But what if a serious injury or illness prevents you from doing so long term? Without your main source of income, how will you pay your bills and daily living expenses? Your mortgage, student loans, and other debts won't just disappear overnight either.
Fortunately, that's where disability insurance comes in. And here, we cover everything you need to know about long term disability insurance. Read on to learn more about the best way to protect your income.
Long term disability insurance is a type of income protection that is designed to cover serious injuries and illnesses that keep you out of work for three months or longer. This includes permanent disabilities that leave you unable to return to work.
Long term disability coverage is a smart investment for healthy, employed individuals who want to secure their financial future. You can get covered by yourself, as a part of a group, or both.
For the most part, long term disability works just like any other type of insurance.
As the policyholder, you make recurring premium payments, typically on a month-to-month basis. In return, your insurance carrier agrees to pay you long term disability benefits if you suffer a serious injury or illness that prevents you from working for an extended period of time.
Each long term disability insurance policy spells out:
- The benefit amount, or how much long term disability will pay you on a monthly basis if you become disabled.
- The elimination period, or the amount of time you must wait after a disabling event before your long term disability benefits start.
- The benefit period, or how long your long term disability benefits will last if you become disabled.
- The definition of disability, or what types of conditions your policy will cover and what it won’t cover.
- The premium amount, or how much disability insurance will cost you on a monthly and annual basis.
Let’s dive deeper into each of these.
Your policy’s benefit amount determines how much you will receive in long term disability benefits if you become disabled.
In most cases, your benefit amount will be a percentage of your income. The size of your disability insurance benefit amount will depend on the policy. Generally, long term disability policies can replace anywhere from 60 percent to 80 percent of your income.
In addition, many policies replace the income that is lost if you have to take a lower-paying job due to an injury or illness.
Long term disability coverage starts after you are approved by the insurance company, you accept the offer for coverage that is made, and you begin paying your premiums.
When long term disability benefits start isn’t as straightforward though.
Your policy’s elimination period will determine when long term disability benefits kick in if you become disabled. This is also known as the waiting period because it states the period of time you must wait after your disabling event before you begin receiving benefits.
When applying for long term disability coverage, your waiting period options typically include 30, 60, 90, 180, or 365 days.
Long term disability coverage lasts as long as you make your premium payments on-time and in-full. Simple as that.
However, it’s important to note that long term disability benefits may not last forever if you do need to receive them.
How long your long term disability benefits will last depends on your policy’s benefit period. The benefit period may be a certain number of months or years, or up to a certain age. Typically, benefit period options for long term disability insurance policies include 2, 5, or 10 years, or until ages 65 or 67.
Typically, you will not have to pay private long term disability insurance benefits back. These benefits are treated as tax-free income that you have earned by paying premiums. However, there are rare exceptions where you may need to pay a portion back.
By law, you are allowed to collect benefits from a private insurer and the government. In fact, you are required to if your private long term disability policy has an offset provision. The amount of Social Security Disability Insurance (SSDI) benefits you collect will then be deducted from what your private insurer pays you.
SSDI benefits are difficult to get approved. If you are approved, it could still be months, even years, before you begin receiving benefits. That's why SSDI benefits begin with something called a catch-up payment. It's a lump-sum that makes up for the time it took the Social Security Administration (SSA) to review your application.
Meanwhile, long term disability is more straightforward. Approval is quicker and benefits start paying as soon as your elimination period ends, likely before your application for SSDI benefits has been processed. If so, your policy's offset provision will require that you pay the SSDI catch-up payment you received back to your private insurer. That way, your SSDI benefits are being accurately deducted from the private benefits you receive.
Here are the top five reasons for filing long term disability claims:
- Musculoskeletal disorders
- Mental health issues including depression and anxiety
- Injuries such as fractures, sprains, and strains of muscles and ligaments
As you can see, the scope of disabling events is wide. That's why perhaps 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. 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.
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 it will cost.
Definition of disability
Long term disability insurance policies will typically define disability in one of four ways.
An 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 that 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.
An own occupation definition of disability is the opposite of any 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 fewer hours because of a disability.
- There are some tasks in 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.
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.
The transitional own occupation 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.
Long term disability benefits
Many private long term disability insurance policies include optional benefits and 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.
The residual disability 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 the time.
Benefits are typically calculated as a percentage of your loss of earnings or what you would receive if you were unable to work.
The future increase 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 your policy issuance will likely change over time. The future increase rider is designed to help policyholders update their coverage accordingly.
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.
The catastrophic disability 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:
- 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 doesn't long term disability insurance cover?
Long term disability insurance covers a lot, but it can’t cover everything. There are almost always coverage exclusions and limitations.
To avoid any confusion or surprises, exclusions and limitations 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 may 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.
Since they are sometimes confused, it's important to highlight the difference between long term disability and long term care insurance. A long term care policy will cover the costs of nursing homes, assisted living facilities, or in-home care if you become unable to care for yourself. However, it will not replace lost income like a long term disability policy.
Learn More: What Is Long Term Care Insurance?
On average, you can expect the cost of long term disability insurance to be between 1 percent and 4 percent of your current income. But that’s just a ballpark estimate.
How much you pay for long term disability actually depends on a number of lifestyle and policy choices. That’s because insurance companies underwrite long term disability coverage based on the risk of an applicant filing a claim, as well as how long and how much a person might collect in benefits.
Cost increases with age
The older you get, the more prone you become to experiencing a disability event. 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.
Women pay more than men
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, autoimmune disorders, and depression, more than men. Disability claims for women also typically last longer than those for men.
- 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 of life insurance. Women consistently live longer than men, which means they get the same preferential treatment you see men getting here.
The healthier you are, the better
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: No Exam Disability Insurance
Not all jobs occupations are treated equally
Disability insurance is designed to protect your income, so it should come 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.
The more you earn, the more there is to insure
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.
Your policy choices matter, too
So far, we’ve highlighted personal factors that influence the cost of long term disability insurance. However, there are also various policy choices that will influence how much you pay in monthly premiums.
The benefit period you select is a prime example. 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.
Your elimination period, or waiting period, is another example of a policy choice that impacts long term disability insurance cost. 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: How Much Does Disability Insurance Cost?
All long term disability insurance plans are backed by 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:
- 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 vs. group coverage
The main difference between individual long term disability and group long term disability 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 offers to pay some or all of the policy cost.
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 individual long term disability insurance will require you to:
- Fill out an application
- Go 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 pales in comparison to the cons of group coverage.
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 of the primary advantages 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 canceling a group membership.
If you earn an income, you should strongly consider purchasing a long term disability insurance. This is especially true under the following circumstances:
- You have dependents who rely on you financially, such as a spouse, kids, or aging parents.
- You have debt that you need to pay off, such as student loans or a mortgage.
- You have a high-paying job occupation that is not easily replaceable (doctors, lawyers, and CPAs).
- You are self-employed (small business owners, independent contractors, and gig workers).
- You have a technical job occupation that requires 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 Insurance (SSDI). 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 SSDI pays in monthly benefits
It's pretty clear why long term disability insurance is such a valuable component of your financial safety net. But is it the cost of long term disability insurance actually worth it?
The best time to buy long term disability insurance is right now.
A serious accident or injury can occur at any time, anywhere. 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 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. That’s why it makes sense to lock in a lower rate at a young age.
Ultimately, deciding whether or not to insure your income is as important of a decision as you will ever make — and it’s entirely up to you.
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.