Some of the links included in this article are from our advertisers. Read about how we make money.
The last thing you want to do is to add an expense to your budget. Especially if it’s another type of insurance, I mean, enough already, right?
But when you realize that disability causes mortgage foreclosures 16X(times) more than death does, it changes things. You start understanding why having some type of long-term disability insurance in place is essential.
In this post today, I will help you understand if long-term disability insurance is worth it, how it works, who needs it, and what it covers.
Table of Contents
- What Is Long-term Disability Insurance?
- Who Should Get Long-Term Disability Insurance?
- When Should I Buy Long-Term Disability Insurance?
- How Does Long-Term Disability Insurance Work?
- The Parts Of A Policy
- What’s Covered By Disability Insurance?
- What Isn’t Covered By Disability Insurance?
- How Much Does Long-Term Disability Insurance Cost?
- Alternatives To Individual Long-Term Disability Insurance?
- Long-Term vs. Short-Term Disability Insurance
- Who’s The Best Long-term Disability Insurance Company?
- Is Long-Term Disability Insurance Worth It?
- The Bottom Line
What Is Long-term Disability Insurance?
In general, I like to think of disability insurance as paycheck insurance because, in essence, that’s what it does; it “insures” your paycheck.
When we rephrase it to long-term paycheck insurance, it has a better ring to it and is easier to understand.
In simple terms, a long-term disability policy is income protection against becoming temporarily or permanently disabled.
Your disability can come from either an accident or illness that could last for several months or years.
You might also see Long-term disability referred to as LTD insurance.
Who Should Get Long-Term Disability Insurance?
If you have an income, you need long-term paycheck insurance. But this is even truer if you match any of the situations below:
Small Business Owners
Most of us are trying to get over to the right side of the cashflow quadrant. However, once you get there, you still need to protect your income, especially since we wear tons of different hats daily.
Small businesses usually are a business of one until you can generate enough income and need to start hiring a team.
But if you had to stop working due to a disabling event that lasted for a long time, you would probably lose your business.
Even if you made it to the point of having employees, it would still impact them negatively if you had to be away from the business for months.
As a small business owner, don’t waste time. You must protect yourself, your family, your business and your employees.
Figuring out the best disability income insurance option will be essential, and there are a few different types that we discuss below.
For my friends who have kids, their most significant concern is always about the quality of life their child has now and what it will look like in the future.
When you don’t have any dependents, it’s easy to not worry about becoming disabled. However, it is essential to think about how that would affect your children if you completely lost your income.
Especially if you have kids that still need to be in daycare, how would you cover those costs?
If you become disabled, as a parent, having that partial income to replace your regular paycheck will allow you to keep your family afloat.
While you may need to cut back on some expenses, you would still be able to cover things like your:
- Car note
- Mortgage or rent
- Cell phone bill
- Credit Card payments
Right now, we are in the age of the Gig Economy. As a matter of fact, over 57 Million people are considered freelancers or do some type of freelance work.
As a freelancer, you are going to be 100% responsible for finding work, completing that work and then paying your bills.
If you don’t show up, there is absolutely no way for you to complete the work or make money. And after a few missed deadlines, you would probably start losing customers fast.
Having a partial income to protect yourself while you are dealing with any disabling event would give you the ability to get better and still survive.
Once you are feeling better, you can always find more clients. But if you didn’t have any income, it could ruin you and your family financially.
A Single Income Household
It would be chaotic if you had to go from a single income household to a zero income household.
Just think of the things you would have to contend with:
- A stay at home spouse would need to get a job
- Little kids would need a babysitter
- No immediate income for household expenses
We all know that stay at home parenting is a full-time job and requires some form of income to keep it running smoothly.
But even if you both currently have an income, what if you were in a situation where one of your income was 100% required to keep things running like:
- Paying credit card bills
- Costs for health care
- Mortgage & rent
- Car notes
As a single income house, you need to have disability insurance. And if you don’t have it, you need to get it fast.
When Should I Buy Long-Term Disability Insurance?
You might think because I am an insurance agent that I am biased. However, there is no better time to buy long-term disability insurance than right now.
We can’t predict what will happen to our lives in the next 30 seconds, let alone a week or a month.
And guess what? Once you become disabled, you can’t get covered at all. So the worst thing you can do is think that nothing can happen to you.
The numbers don’t lie; a 25-year-old has a 58% chance of long-term disability before age 65.
And like all insurance products, the longer you wait, and the older you become, the more expensive the premiums will become.
You are permanently leaving money on the table; there isn’t any reason to go without coverage and absolutely no reason to wait around.
How Does Long-Term Disability Insurance Work?
Now that you understand what long-term disability coverage is, who needs it and when you should buy it, it’s time to go over how it works.
So, when you pay your monthly premium, the insurance company is agreeing to pay you a set amount of benefits.
If you were to suffer a disability that affects your ability to work, you could file a claim, and the payouts would start.
Usually, these benefits can replace a pretty large portion of your income that you would have otherwise lost.
The Parts Of A Policy
There are several parts of a policy that you need to know about.
Each disability policy is going to have a waiting period, often referred to as the elimination period. It determines how long you have to be disabled before the benefit kicks in.
It assumes that if you are disabled for a short period, you will have a short-term disability policy in place or use your cash savings.
The shorter your waiting period, the higher your monthly premiums will be, and the longer the waiting period, the lower your overall premiums will be.
You can usually choose between:
- 30 days
- 60 days
- 90 days
- 180 days
- 365 days
Remember, you need to know how your elimination period works. And if you aren’t disabled for that specific length of time, your coverage won’t kick in.
When dealing with long-term paycheck insurance, you can also choose how long you want to receive benefits if you have a disabling event.
You can choose periods from:
- One year
- Five years
- Ten years
- Up to a specific age, like up to age 65
Of course, the longer you want your benefits to last, the more expensive the policy will cost monthly.
The benefit amount is going to be what you are getting paid each month. It will usually be a percentage of your income and can go up to 60% of your gross monthly income.
Depending on the company, and based on your income, you can choose the amount of benefit you would like before purchasing your policy.
Again, the more benefit you request, the higher your monthly premiums.
The premium is how much you will pay per month for your policy.
Definitions Of Disability
Understanding the definitions of disability when it comes to a disability policy is essential because it will determine how the policy will payout.
Some policies will pay out a benefit if an injury prevents you from working at your regular job, but allows you to do other types of work.
While other policies will not pay benefits if you can work in another type of industry, even earning less money.
There are four ways a long-term disability insurance policies usually define disability, and they are:
The way this definition works is that if you are able to work any other job, then you are ineligible for benefits.
Even if the job pays much less than what you earned before becoming disabled, you still won’t qualify for benefits.
Any occupation is one of the toughest definitions of disability a policy can have.
An any occupation policy will usually have the lowest premiums. But it will also have the least amount of coverage.
The own occupation definition is all about protecting your ability to work in your “Own” given career field.
If a disability prevents or limits you from working the exact job you had when you became disabled, you’re covered.
Even if you can work in another capacity, you will still be eligible for benefits.
Other ways an own-occupation policy can cover you is if:
- You have to work fewer hours because of a disability
- There are some tasks of your job you can’t perform
If available, I would recommend getting the own occupation rider on your policy since it’s the maximum amount of protection you can get for a disability definition.
Modified Own Occupation
The way a modified own occupation defines disability is the inability to perform any job.
Basically, with a Modified own occupation definition, you get to choose if you want to work or not, even if it is deemed you are capable of working.
You are still paid benefits regardless of what you choose.
Transitional Own Occupation
This definition of disability is almost like own occupation coverage with one main difference.
It determines how your benefits are treated if you work in another occupation after an injury or illness.
The transitional own occupation policy limits your benefits based on the difference between your total disability benefit amount and post-disability income.
What’s Covered By Disability Insurance?
So what exactly can you use the money from a disability insurance policy for? Well, here are a few things:
- Mortgage or Rent
- Car Loan
- Cell Phone Bill
- Living Expenses
- Medical Bills
- Credit Card Bills
- In the words of Shirly Caesar, You Name It!
There truly isn’t any limitation on what you can use the benefits for; it’s essentially the replacement of your paycheck.
What Isn’t Covered By Disability Insurance?
It’s very easy to get long-term disability insurance and long-term care insurance confused.
The way long-term care insurance works is that if you are unable to do two of the six activities of daily living (ADL), it will cover the costs associated with getting you some care.
However, disability insurance is only designed to cover a portion of your income. So it doesn’t cover extra expenses like your long-term care costs.
It is up to you to determine how you spend the money that you receive.
How Much Does Long-Term Disability Insurance Cost?
To understand the cost of a long-term paycheck policy, you must first understand the metrics that are used to determine the final cost:
As with almost any type of insurance, the older you become, the higher the probability of you filing a claim, so the higher the rates will become.
Just look at some sample rates based on a $4,300 monthly benefit that lasts five years:
|40||$82.00 / month|
|45||$104.00 / month|
|50||$129.00 / month|
|55||$167.00 / month|
As you can easily see, the sooner you purchase your disability insurance, the more affordable it will be.
Unlike life insurance, when it comes to gender, with all other factors being equal, women usually pay up to 40 percent more in premiums than men for disability insurance.
The reason for the price difference is because women suffer disabilities more than men, and their claims typically last longer than men.
A 40-year-old male applying a $3,300 monthly benefit will pay $61 a month compared to a 40-year-old woman getting the same coverage will pay $80 a month.
Again, as I stated above, the gender price gap for disability insurance is the opposite of life insurance.
Women live much longer than men, so their life insurance rates will always be much more affordable.
Of course, your health is considered when you purchase a disability insurance policy.
If you have lower than average health or use tobacco, you have a higher ability to suffer from a disability.
When assessing your health, disability insurance companies may request the following:
- A medical exam
- 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, if you are in great health, there is a way to get a no exam disability insurance policy through a company called Breeze.
Since disability insurance is primarily for your income, your current career will have a significant impact on the cost of your policy.
The more prone to injury or illness you are in a job, the higher the premiums will be.
If it’s more challenging to perform a job with specific injuries or illnesses, the more the insurance company will likely have to pay in benefits.
These occupations are grouped into specific risk classes, which are numbered on a scale of one to five or six.
If your career is in a higher group number, the lower the risk, and the lower the premiums, the lower the group number, the higher the premiums.
An accountant is considered to be in a Class 4-A Tier, which are jobs that don’t require much manual labor.
However, a roofer is considered to be in a Class 1-A Tier, which are jobs that have high manual labor requirements compared to others.
Companies base your disability insurance benefits on a percentage of your income. So part of the calculation of your premium is how much you earn.
For underwriting purposes, an income is considered earned if a disability would stop or reduce it.
So if you have an investment or business income that doesn’t require work on your part, they will not factor it into your underwriting.
Underwriters will assess your salary, wages, regular overtime, bonus, and even commissions.
Again, the benefit period is how long you would like your benefits to payout.
You can choose your benefit period, and while the most cost-effective option is five years, you can go as low as one year or up to age 65.
Remember, the longer your benefit period is, the more you can expect to pay in premium.
Elimination or Waiting Period
Every long-term disability insurance policy will also include an elimination or waiting period.
This is the time between when a disability occurs and when your benefits start paying out.
These periods can last from 30 days up to a year. But keep in mind, the shorter the elimination period, the higher your premiums.
Alternatives To Individual Long-Term Disability Insurance?
Depending on your specific situation, purchasing a long-term disability policy right now might not be the best financial decision.
Below are a few alternatives to consider, but depending on your situation, they might not work out as you need them to:
If you can get long-term disability through work, then you should jump on it like a fresh batch of hotcakes.
Just like with health insurance, purchasing a disability product through an employer is going to be much more affordable monthly.
When you are enrolling or opting-in, you still need to make sure you understand precisely how the product will work.
You need to know the benefit period, benefit amount and elimination period.
Social Security Disability Insurance (SSDI)
While you might think you can forgo disability insurance because you can apply for SSDI, you might want to think again.
Only 35% of people who apply for SSDI benefits are approved because of their super strict requirements.
This means that 65% of people who thought that would be covered are going without getting coverage, and it’s probably too late for them to purchase a traditional policy.
While SSDI can come in handy if you qualify, there’s a 65% chance that you won’t.
Now, workers comp sounds like a great plan until you read the fact that close to 90% of disabling accidents and illnesses are not work-related.
So the probability of you actually being able to use your worker’s comp is only 10%.
I find this to be too low of a chance to put all of your eggs in one basket with “workers comp” being your answer.
But, if you are injured on your job and able to get workers comp, it is great.
However, think about how much better it would be if you were also able to submit for your disability.
Long-Term vs. Short-Term Disability Insurance
When it comes to disability insurance, there are two different types that you will often read about: short-term and long-term.
Short-Term Disability Insurance
Short-term disability insurance that focuses more on less severe injuries and illnesses.
This type of plan is excellent for a disabling event that may limit your ability to work, but it’s something you will recover from.
Short-term disability coverage also has a much shorter elimination period (around 14 days) and a shorter benefit period (usually no more than six months).
- An electrician breaking a leg or foot
- A bus driver needing to recover from hip surgery
- A cashier needing time off to recover from cancer treatments
Long-Term Disability Insurance
As you read throughout this post, long-term disability is about more extreme injuries and illnesses.
You will also have coverage that lasts much longer and also has a more extended elimination period.
Their Main Differences
The main differences between short-term and long-term disability insurance are:
- The primary types of disabling events they cover
- The length of time you can receive your benefits
- How long you must wait before your benefits kick in
|Short-Term Disability||Long-Term Disability|
|Benefit Period||Up to 6 months||1 Year or Longer|
|Elimination Period||Up to 30 days||30 days to 1 year|
Who’s The Best Long-term Disability Insurance Company?
It would be utterly irresponsible of me to say that there is one company that is best for everyone. But I do have a company in mind that you might want to check out.
If you would like to buy long-term disability coverage, I would suggest Breeze. They are offering a long-term disability product that has become the first of its kind.
Their policy will provide you a disability policy entirely online with no exam and no income docs in under 15 minutes.
Breeze offers a ton of included features in their product, such as coverage for things like partial disability, presumptive disability, home modifications, and survivors benefits, to name a few.
You can also add riders like the own occupation provision we discussed above.
Along with all of those great features, they are backed by Assurity Group, which has an A (Excellent) rating from A.M. Best for financial stability.
So if you are a healthy individual, would prefer to avoid an exam, and want to get covered quickly, then Breeze could be the best option for you.
Is Long-Term Disability Insurance Worth It?
I can’t decide if long-term disability insurance is “worth it” for you.
However, I can give you some strong data points as to why you need it:
- More than 25% of today’s 20-year-olds will be out of work for at least a year because of a disability before they retire.
- At least 51 million working adults in the United States are without disability insurance in 2019.
- Only 40% of US households have at least $6,275 in savings. That is only three months of income to live on for a family of four.
- Four out of ten American adults indicate they can’t pay an unexpected $400 bill without having to borrow money.
And get this, the most common causes of long-term disability are:
- Musculoskeletal disorders (29.7%)
- Cancer (14.8%)
- Injuries such as fractures, sprains, and strains of muscles and ligaments (12.3%)
- Mental health issues (8.6%)
- Circulatory (heart attack, stroke) (8.1%)
You probably noticed that injuries only account for 12.3% of all long-term disabilities; this means that your career choice won’t save you from a disability.
The Bottom Line
The numbers are real, and they are scary, to be honest.
If you are working and earning an income, no matter your situation, you need to get disability insurance.
Even if you can only afford to get a small amount of coverage in the beginning, you need to take action because some coverage is better than no coverage.
There is no better time to get disability insurance than “Right Now” because it’s super easy to apply online, and the rates are affordable.
You are already ahead of the curve by simply reading this post and learning more about disability insurance. But now that you know about it, what will you do?
Have you ever needed to utilize short-term or long-term disability insurance? If so, share your experience with us on our Facebook page.
Sa El is the Co-Founder of Simply Insurance. He is a Licensed Life and Health Insurance Agent with over 11 years of experience in the industry. He is an Entrepreneur, Insurance Educator, and Field Underwriter.