Long-term disability insurance: How does it work

Long-term disability isn’t just for people with dangerous jobs. In fact, most long-term disability claims have nothing to do with the job. 

Let’s take a look at long-term disability insurance, why you may need it, how it works and how much it costs. 

Why you need long-term disability insurance

One in four of today’s 20-year-old will become disabled before they retire, according to the Council for Disability Awareness.

Those disabilities are usually for non-work-related injuries and illnesses. Common reasons for disability claims are: 

• Neck and back pain
• Muscle and tendon disorders
• Foot, ankle and hand disorders
• Cancer

A disability can strip you of your ability to make a living. While some people can tap into their savings to get by without working for a few months, few people can afford to stop working altogether for a longer period of time.

That’s where long-term disability insurance can help. Long-term disability policies provide you with income for an extended period. Most people who have long-term disability insurance get it through their employers, although you can buy individual long-term disability insurance on your own. Also, even if you have long-term coverage from an employer, the payouts are usually not enough to bridge the gap until you can return to work.

How does long-term disability insurance work?

Long-term disability insurance pays a percentage of your salary, usually 50 to 60%, depending on the policy. The benefits last until you can go back to work or for the number of years stated in the policy.

Insurers won’t begin helping you until you’ve passed through the elimination period. The elimination period is the length from when your doctor diagnosed the disability to when you can start collecting from the long-term disability insurance policy. 

The average long-term disability claim is nearly three years.

 

Cost of long-term disability insurance

Long-term disability insurance pays a percentage of your salary, usually 50 to 60%, depending on the policy. The benefits last until you can go back to work or for the number of years stated in the policy.

Some policies pay out as long as you are disabled until age 65. The average annual cost of a long-term disability policy is more than $2,000, but the exact cost varies based on many factors, including your salary. It’s usually 1% to 3% of your salary. 

When figuring out cost, an insurer looks at your:

• Income
• Age
• Health
• Gender
• Smoking status
• Occupation

Then, the company will review the length of the benefit period (how long you can collect) and elimination period (how long before you can start to collect after diagnosis). The payment type (level or graded) and riders also play a role in cost. 

Long-term disability insurance riders

Three common long-term disability insurance riders are:

• Enhanced partial disability benefit rider, which provides partial disability payment if you become partially disabled. Most long-term disability policies have this rider. 
• Cost of Living Rider (COLA) rider increases the policy’s benefit with a minimum benefit adjustment of 3% annually. This helps assure that your disability benefits don’t fall behind after years of inflation. 
• Future increase option rider allows you to you get more long-term coverage later without having to go through the application process again. 

A policy’s disability definition also influences the cost. The more limited the definition, the less you’ll pay. That includes the disability level (only collect if totally disabled or you can collect if partially disabled) and occupations you can work if you’re disabled.

Employer long-term disability coverage

Some people get long-term coverage via an employer. If you pay your own premiums with after-tax dollars, your disability benefits will be tax-free. If your employer pays for the policy, most likely with pre-tax dollars, you’ll have to pay income taxes on the benefits. Also, if you need to file a claim, any payments will also be taxable. 

Even if you have employer-sponsored coverage, those benefits are more limited than individual coverage. For instance, you’ll lose protection if you change jobs and payments are smaller in employer plans. 

Most disability insurers will work with employers to help you return to work as quickly and safely as possible. While disability insurers want to see people healthy and rehabilitated, they also save money if a claimant quickly returns to work.

You’ll most likely find your disability insurer managing the claim if you are “partially disabled” — meaning you can still work but only in a job that pays substantially less. In cases where you’re only able to earn less than 20% of what you previously made, you’ll likely get full disability benefits that are based on your pre-disability income.

For example, if you worked in a warehouse and earned $40,000 annually, then hurt your back and had to take a part-time desk job that paid less than $8,000 a year, your long-term disability policy likely would pay you full benefits based on your pre-disability wages of $40,000. If the full benefit was 60 percent, you would get 60 percent of $40,000, or $24,000.

If, however, you were able to earn between 20 and 80% of your pre-disability income, you’d get a proportionate amount of income based on the percent you could earn. If you can earn more than 80% of your pre-disability income, most insurers do not consider you disabled.

A few insurers offer a dependent care reimbursement benefit, meaning they also reimburse the employee for child care expenses if the employee’s spouse must go back to work as a result of the disability.

If you become disabled and begin receiving benefits, you will no longer have to pay premiums. Most policies contain a “waiver of premium” provision that states you can stop paying premiums if you are disabled for 90 days or longer.

What conditions qualify for long-term disability? 

Long-term disability is an issue that affects your physician, mental or emotional health for at least 12 months. 

Disability classification varies by type of employment. For instance, a person who works at a desk may still be able to work with a major leg injury, while someone who works a labor job wouldn’t be able to do the job. 

A disability isn’t often connected to a work-related injury. Instead, it could be a chronic illness or medical conditions that make it impossible to work. 

The list of possible long-term disability conditions includes dozens of health issues. Some possible long-term disability conditions include:

• Anxiety and depression
• Back pain
• Cancer
• Chronic pain
• Diabetes
• Epilepsy
• Heart disease
• Leukemia
• Parkinson’s Disease
• Stroke

However, make sure to read the policy’s fine print to see what conditions are excluded. 

 

Long-term disability exemptions

A long-term disability company may deny you based on your health or could include policy exclusions. These exclusions would mean you’re not covered for those ailments and injuries. 

Policy exclusions can include:

• Cancer
• Uncontrolled diabetes
• Back pain
• Obesity
• ALS
• Mental illness
• Alcohol or drug-related issues

Women usually can’t get covered for pregnancy-related disabilities if they’re already pregnant.  Long-term policies consider that a pre-existing condition. You may still be able to get a policy, but it won’t cover your pregnancy. 

Your employer may be able to help if you’re pregnant and you’re looking for disability coverage. Employers may offer short-term disability insurance for maternity leave. That’s not available in the individual market. 

Disability insurance for self-employed people

Disability insurance can be especially vital for people who are self-employed. 

Not being able to work without a safety net can leave you in debt and force you to miss mortgage payments. 

Disability insurance for self-employed people is often more complicated than for others. If you have employees, you may need to get additional protection if the business couldn’t function without you. Insurers also often demand that self-employed people have owned their own businesses for a period. You may also need help with rent and business expenses. 

Those issues make disability insurance more complicated and expensive than a person who needs coverage only for themselves.

 

How to get long-term disability insurance

If your employer doesn’t offer group disability insurance, or if you think your group policy doesn’t provide adequate coverage, you may want to consider buying an individual long-term disability policy. You can find the best disability insurance for you through financial planners, the same agents who sell you life insurance or annuities,or sometimes through your mortgage company.

Most policies are sold on a “non-cancellable” or a “guaranteed renewable” basis, according to the Insurance Information Institute (III). With a non-cancellable policy (which requires an initial medical exam), the insurer cannot cancel the coverage or raise your premiums. If you buy a policy on a guaranteed renewable basis, the insurer cannot cancel the coverage as long as you pay premiums, but it can raise rates on a class or group of insured people who have the same policy, work at the same place or share another, non-risk-associated characteristic.

According to the III, most individual policies also have features that allow benefits to keep pace with inflation or gradual salary increases, such as a cost of living adjustment, which adds a percentage to your benefit each year.

Disability insurance is an important piece of your insurance portfolio that will help protect you during life’s unexpected events. If you’re dependent on your working income, make sure it is protected.

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