One of most people's goals is to have a career that allows them to do what they love. We attend school for years and often take out substantial student loans to obtain an education that will allow us to have personally satisfying and financially secure employment.
But what if a serious illness or injury prevents you from pursuing your dream job? Without your paycheck, how are you going to pay your bills each month? Your rent or mortgage payment and all your other debts and obligations remain and must be paid.
Fortunately, disability insurance provides income when you are unable to work. This article covers everything you need to know about long-term disability insurance, including what it is, how much it pays, when it takes effect, how long it pays, and much more.
Go to these sections:
- Definition of long term disability insurance
- Difference between short term and long term disability insurance
- How long can long-term disability be accumulated?
- Who typically purchases or qualifies for long-term disability insurance?
- How much does disability insurance cost?
- How much does disability insurance pay?
- What should you look for in long term disability insurance?
- Frequently asked questions about other long-term disability insurance
Keep reading to learn more about protecting your income.
Definition of long term disability insurance
Long Term Disability Insurance (LTD) is a product offered by manylife insurance companywhich replaces part of your income if you are unable to work due to a serious injury or illness. Insurance companies sell it to companies and organizations that offer it as benefits to employees or directly to individuals.
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Difference between short term and long term disability insurance
The main difference between these two types of disability insurance is the length of time the insurer pays benefits.
Short-term disability (STD) insurance policies are designed to replace part of your income for up to two years. If your disability went beyond that, the insurer would stop your payments, potentially leaving you with no source of income.
Long-term disability insurance is designed to replace lost income over many years, with some policies paying benefits until age 65 or 67. It covers potentially permanent injuries and illnesses, while STD policies are designed to cover temporary disabilities.
For example, short-term disability insurance would benefit a plumber who broke his arm and was unable to work for six weeks, but would not help an airline pilot who is diagnosed with dizziness and will never be able to fly again. In this case LTD insurance would be required.
What does long-term disability insurance cover (or not cover)?
According toDisability Awareness Board, the most common causes of disability:
- Illnesses such as cancer, heart attack or diabetes cause most long-term disabilities. Back pain, injuries and arthritis are also the main causes.
- Most are non-occupational and therefore not covered by workers' compensation.
- Lifestyle choices and personal behaviors that lead to obesity are important contributing factors.
- Musculoskeletal disorders are the number one cause of disability. Examples include; Arthritis, back pain, spine/joint disorders, fibromyositis, etc.
here is onediagramwith common terms and examples for diagnosing disability claims.
LTD insurance includes standard exclusions found in most life, health and disability policies:
- Intentionally self-inflicted injuries
- Active participation in a riot.
- Loss of professional or professional license or certificate
- committing a crime
- Work-related illness or injury that would cover workers' compensation.
- acts of war
- criminal activities
LTD policies generally do not cover people with other pre-existing conditions such as
- VIH/SIDA
- Krebs
- heart disease
- Diabetes
- neurological problems
For a claim to be approved, it must meet the definition of disability outlined in your policy. This can vary greatly depending on the policy and insurer.
How long can long-term disability be accumulated?
The length of time you receive benefits depends on the term you chose when you applied for your policy and what your policy says. The individual disability insurance benefit period is generally 2, 5 or 10 years or up to age 65 or 67.
The insurance company must continue to pay you each month while you are on the contract, unless or until you can return to work, at which point your benefit payments end.
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Who typically purchases or qualifies for long-term disability insurance?
Individuals who purchase LTD insurance could not survive financially without a paycheck if they are unable to work due to illness or injury.
For example, an office worker who only receives a paycheck every two weeks when he reports for work typically buys LTD insurance because his paycheck depends on his active employment.
But someone who livespassive income, such as B. The rent on the property or dividends on the stock in your portfolio would not normally buy or qualify for disability insurance. Why insurers only approve applications from peopleactively engagedin an income-generating occupation.
How much does disability insurance cost?
Many factors affect the cost of an LTD policy. This includes personal factors such as:
- your age
- your gender
- Your use/non-use of tobacco
- your medical history
- your job
- your income
- The result of a medical exam you completed as part of the application process
In addition to these personal factors, there are several decisions you make when applying for your policy that will affect your monthly premium:
Period of operation:that is, for how long the insurer is obliged to pay benefits in case of incapacity for work (2, 5, 10 years or up to 65 or 67 years). The more time the insurance company has to issue a check each month, the higher your premium will be. Most insurance agents recommend a five-year benefit period as the most cost-effective.
Final term:Also known as the “waiting period,” the cut-off period is similar to a health insurance deductible. Premiums are the opposite of the exclusion period you choose: the longer you wait for the insurer to start paying, the lower your premium will be.
Limitation periods for LTD policies can be as short as 30 days or as long as 365 days. The default duration is 60 or 90 days.
How much does disability insurance pay?
Benefit amounts for LTD policies are based on your income level and the percentage of your income that is replaced. Policies typically replace 60 to 80 percent of your gross income.
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What should you look for in long term disability insurance?
One of the main considerations when purchasing LTD insurance is how the insurer defines disability. Policies generally define disability in two ways: any profession or the profession itself.
Any definition of occupation means that if you can do another job, you cannot receive benefits regardless of salary. For example, a teacher who cannot perform class duties but could work as a clerk is not entitled to benefits.
Any profession has the strictest definition of disability you will find. A policy with this definition has the lowest premiums, but also receives the lowest coverage.
A professional definition of disability is more liberal than any profession. He defines disability as your inability to work at your job. The teacher in our example above would be entitled to benefits under his own professional policy if he could not fulfill his duties as a teacher, although he could do something else professionally.
Most self-employment policies also pay benefits if:
- You have to work fewer hours because of your disability
- There are some work items you cannot do
As you can see, the definition of disability in a policy makes a big difference in what benefits you can potentially receive. Therefore, be sure to read a sample policy carefully before submitting an application. Not knowing whether your policy will be any profession or your profession can be a costly mistake.
There are two other features that every LTD insurance policy you purchase should have:Non-Cancellable Coverage and Remaining Benefits.
Non-cancellable coverage means that the insurer can never cancel your coverage unless you don't pay your premiums. Residual benefits provide that you will receive partial benefits if you cannot perform your duties full-time but can do so on a limited basis.
Other features/drivers to consider:
Cost of Living Adjustment Rider (COLA):This tab increases your benefit amount by accounting for inflation during a long-term claim.
Future increase option:guarantees you the right to take out supplementary insurance up to a certain age without having to undergo another medical examination.
Exemption from unemployment benefit:Insurance premiums are waived if you lose your job.
Pension for Catastrophic Disability:if you are unable to perform two or more activities of daily living (e.g., eating, bathing, dressing, moving, continence), have cognitive impairment, or have lost vision in both eyes or hearing in both eyes ears, receive up to 100% of your previous income from all sources.
Frequently asked questions about other long-term disability insurance
Are benefits coordinated with other benefits, such as workers' compensation or Social Security?
This depends on your policy. Some LTD policies pay full benefits regardless of what you get from Social Security Disability Insurance (SSDI) or Workers' Compensation. Others offset (reduce) your policy benefit by the amount you receive from your other sources.
How much coverage should I have?
You must have at least enough insurance to pay your monthly expenses (mortgage/rent, groceries, utilities, etc.). Additionally, most insurers recommend claiming benefits equal to 60% of your pre-tax earnings.
Should you get individual disability insurance if you have group disability insurance?
Even if you have LTD coverage through work, most financial advisors recommend that you consider purchasing an individual policy. The main reason is that if you leave your employer you probably won't be able to take your insurance with you, and if your health takes a turn for the worse you probably won't be eligible for an individual policy.
Also, the monthly benefit of your Group LTD insurance policy may not be enough to cover all of your monthly expenses, especially if your policy has a coverage limit.
When is the right time to take out disability insurance?
The best time to buy insurance is when you are younger and healthier. Insurance premiums increase with age and there is no guarantee that you will be able to medically qualify in the future.
Should I take out disability insurance?
If you are earning an income, seriously consider getting LTD insurance, especially if:
- You have dependents (spouse, children, elderly parents) who are financially dependent on you
- You have debt that needs to be paid off (mortgage, student loans, car loans)
- Has a well-paying job that is difficult to replace (lawyer, doctor, accountant)
- Self Employed (Small Business Owner, Self Employed, Gig Worker, Independent Contractor)
- You are doing technical work that requires special skills that you would not be able to do if you had a disability.
one last thought
If you want to purchase long-term disability insurance as an individual or through your employer, do not hesitate to make your decision. An accident or serious injury can happen anytime, anywhere. The worst thing you can do is assume "it won't happen to me".