Long-term disability insurance. For most, this term only comes up when applying for company health benefits when you are a newly-hired employee. You know you need health insurance, and they will typically give you life insurance, but what happens if you become disabled?
Long-term disability insurance is, at its foundation, income replacement insurance. It can enable you to make ends meet when you’re not able to work, without having to completely deplete your emergency account or other types of savings. So why isn’t it as sought after as other types of insurance? Because too many people believe either they are unlikely to ever become disabled, or if they do become disabled, their government will bail them out.
If you are shopping for long-term disability insurance for the first time, you can easily find yourself bewildered or confused with such a mysterious topic. But if you drill down to the core of what a long-term disability policy can do for you, and are able to cut through the noise of agents intending to upsell you on options you don’t necessarily want or even need, it’s pretty simple to understand the benefits.
Do you need Long-term Disability Insurance?
In a word, absolutely. You really should have some type of income coverage; one in four employees will come to be disabled at some point in time during their careers, normally from a serious illness like cancer. But the monthly bills will certainly not stop even when your payroll check does. The last thing you will want is to fret about is delinquent payments on top of recuperation and everything else you have to do to get back on your feet again.
The great news is that you might already have long-term disability insurance. Disability insurance coverage was delivered by over 200,000 employers in 2014, so there is a possibility that you are enrolled in some kind of disability insurance program, or have the choice to do so. It’s very important to recognize this before you begin your shopping experience. If you currently have an employer-sponsored long-term disability plan, a supplementary long-term disability insurance coverage you can get on your own could be restricted.
The purpose of this report is to provide you with the fundamentals of what you will need to understand about long-term disability insurance coverage. Like a lot of other financial products, men and women appear to get lost in the weeds and trapped up on details and don’t go forward with their decision-making.
The Basics of Long-term Disability
Long-term disability insurance is designed to replace lost income that results from long-term disabilities. This is commonly recognized as a period of more than 90 days of being incapable of working because of an injury or illness. It is only offered to people who are working at least 30 hours per week (the traditional definition of working full time).
The Elimination Period
This is how much time it will be until your long-term disability insurance coverage kicks in. Also known as the waiting period, you will typically see it established in periods of 60, 90, 180, or 365 days. The longer your elimination period is, the less your insurance premiums will be, but most policies are commonly more cost-effective with 90-day elimination period.
The Benefit Period
This is the time period your benefits will last. You will generally have an option of choosing between two, five, and 10-year periods, until your retirement age or, in some cases, for your lifetime. The longer the benefit period you select, the higher your premiums will be.
This represents the amount of your monthly pre-tax earnings that you will be able to cover. You can select a month to month benefit up to the maximum amount allowed which is usually about 60% of your pre-tax compensation for most plans. The higher your replacement rate is, the more expensive your policy will be.
Normally, your disability coverage should be based on your “own occupation” – which means, you are considered disabled if you are not able to do your own job, as compared to being disabled only if you cannot carry out any job.
How Much Coverage You Need
When you are attempting to decide on how much long-term disability coverage you will need, you want to consider two things: How much money do you need coming in, and how long are you going to need it.
The level of income replacement you require will depend on your personal circumstances. Your chosen lifestyle and the sum of money you will need to deal with your daily expenses will be the leading factor. It will also depend on how much you are able to self-insure for. For the majority of men and women, this will come in some form of an emergency fund.
While this might help in the short-term, many emergency resources are only intended to last about six months or up to a year. Most people do not have an emergency fund that will last multiple years, and taking from other savings accounts like an IRA comes with a stiff penalty.
What will affect the Cost of Long-term Disability Insurance?
As mentioned previously, the elimination period, benefit period, and monthly benefit will all have an effect on the cost of your policy. However, there are a few things about you that can also determine how much you will pay for your long-term disability insurance. Most of them will be the same things that can affect your life or health insurance.
Some occupations inevitably put individuals more at risk of disability than other occupations. A surgeon will encounter higher rates than an attorney because a simple hand injury can end a surgeon’s career, whereas an attorney would most probably be able to continue his/her career.
Since older individuals are at more risk of being disabled than younger people, the insurance rates will increase the longer you wait to apply for coverage.
The insurer will wish to know your current health and health history to forecast your probability of becoming disabled. They do this by using insurance underwriting that may include a medical exam. If you’ve ever had a medical exam for life insurance, an exam for disability insurance is essentially the same. Having any pre-existing conditions may likely cause the insurer to shorten the benefit period, or they may insert exclusions for certain conditions that won’t be covered.
For most people who do not work in the insurance industry, all insurance products are difficult to understand because of unique terms and policies that are written by lawyers. We can help you understand your insurance, why you should have it, and how much you should have.