Long-Term Disability Insurance: What You Need to Know

Life can be unpredictable, and the importance of long term disability insurance often becomes clear only when it's too late. While most of us don’t like to dwell on the possibility of becoming seriously ill or injured, the reality is that these events can and do happen. When they do, the financial impact can be devastating.

Without the ability to earn an income, how would you manage your mortgage, pay for groceries, or cover medical expenses? This is where long term disability (LTD) insurance comes into play.

Designed to provide a steady stream of income if you're unable to work for an extended period, LTD insurance acts as a financial safety net, ensuring that you can maintain your standard of living even in the face of life-altering circumstances.

Whether you’re just beginning to explore your options or you're reassessing your current coverage, understanding the ins and outs of long term disability insurance is crucial. In this guide, we'll break down everything you need to know to make an informed decision, from how much coverage you can expect to what the policy does (and doesn't) cover.

To learn more about all the benefits available to you and your family, sign up now for BenefitKarma.

Long-Term Disability Insurance at a Glance

What is long term disability insurance?

Long-term disability insurance replaces part of your income if you become disabled and can't work for a long time. Benefits usually start after a waiting period of about 3 to 6 months.

Short-term disability insurance covers the first few weeks or months. LTD picks up after that, once your sick leave and short-term disability run out.

You can get LTD in two main ways:

• Through Your Job: Many employers offer group LTD as a benefit. It's often free or low-cost, but it may end if you leave your job.
• On Your Own: You can buy an individual policy from an insurance company. It stays with you even if you change jobs. 

How your policy defines "disabled" matters

This is one of the most important parts of any LTD policy:

• Own-Occupation: You're considered disabled if you can't do your own job, even if you could do a different one.
• Any-Occupation: You're only considered disabled if you can't do any job that fits your education, training, and experience.

Many group policies use the own-occupation definition for the first 24 months, then switch to any-occupation. This is a common reason benefits stop after two years, so check your policy.

How much can you get from long term disability?

Try it: Benefit Eligibility Screener

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The amount you can receive from a long-term disability insurance policy varies based on your income and the specifics of your policy. Typically, LTD policies cover 50% to 70% of your pre-disability income.

For example, if you were earning $5,000 per month before your disability, your LTD policy might provide between $2,500 and $3,500 per month. It’s important to review your policy details, as some may have a maximum monthly benefit cap.

Other benefits you receive, like Social Security Disability Insurance (SSDI), may also lower your payment. We explain how that works below.

How much does it cost?

An individual policy often costs about 1% to 3% of your yearly income. The price depends on your age, health, job, and the options you choose. For example, if you earn $60,000 a year, you might pay about $600 to $1,800 a year. Group coverage through work is usually cheaper, and many employers pay for it.

What does long term disability insurance pay for?

The benefits from LTD insurance can be used to cover a wide range of living expenses. These may include:

• Housing costs: Mortgage or rent payments, utilities, and maintenance.
• Daily living expenses: Groceries, transportation, and other essential needs.
• Medical bills: Costs not covered by health insurance, such as copays, deductibles, or out-of-pocket expenses.
• Debt payments: Credit card bills, student loans, or other financial obligations.
• Childcare and education: Tuition or daycare costs, if applicable.

Essentially, LTD benefits help maintain your standard of living by covering the costs you would typically handle with your regular paycheck.

What does long-term disability insurance not cover?

While long-term disability insurance offers crucial financial protection, it's important to understand its limitations. It’s essential to read the fine print of your policy to fully understand exclusions, but generally, most policies do not cover:

• Pre-existing conditions: Disabilities resulting from conditions that you had before purchasing the policy may be excluded, especially if the condition was treated or diagnosed within a specific time frame before coverage began.
• Self-inflicted injuries: Disabilities caused by self-harm or suicide attempts are generally not covered.
• Work-related injuries: These are typically covered by workers’ compensation insurance, not LTD.
• Short-term disabilities: Disabilities lasting less than the policy's waiting period (usually a few months) won’t be covered by LTD insurance.
• Specific exclusions: Some policies exclude coverage for certain high-risk activities, such as extreme sports or substance abuse-related disabilities.

How do I choose an LTD plan?

When evaluating long-term disability insurance policies, you’ll want to compare the various components that make up each policy:

• Coverage Limits: For example, some policies might offer coverage up to $5,000 per month, while others may cap benefits at $3,000.
• Elimination Period: Check the elimination period (waiting period before benefits start); options might range from 30 to 180 days. Shorter waiting periods often come with higher premiums, so balance your budget and coverage needs.
• Exclusions: Review the exclusions carefully — some policies might exclude conditions like pre-existing medical issues or high-risk activities.
• Riders: Look for policies with riders that fit your lifestyle, such as a cost-of-living adjustment (COLA) to keep pace with inflation or a future purchase option that allows you to increase coverage without additional medical underwriting.
• Customer Service: Investigate the insurer’s customer service track record by reading reviews and checking ratings from organizations like J.D. Power or the Better Business Bureau.

How do you apply for long-term disability insurance?

Applying for long-term disability insurance typically involves several steps:

1. Research and compare policies: Start by researching different insurance providers and comparing their policies. Look for coverage amounts, premium costs, benefit periods, and policy exclusions.
2. Underwriting process: Once you’ve selected a policy, you’ll need to complete an application. This often involves providing medical history and may include a physical exam. The insurance company uses this information to assess your risk and determine your premium.
3. Approval: After underwriting, the insurance company will either approve, deny, or modify your application. If approved, you’ll begin paying premiums to keep the policy active.
4. Filing a claim: If you become disabled, you’ll need to file a claim with your insurance company. This process usually requires medical documentation of your disability and proof of your inability to work.

Filing a claim if you become disabled:

1. Contact the Insurer Early: Start your claim before your waiting period ends, so your payments aren't delayed.
2. Send Your Forms: You'll usually fill out a form, your employer completes one (for group plans), and your doctor completes one.
3. Send Medical Proof: Include records that show your diagnosis, treatment, and why you can't work.
4. Keep Up With Requests: The insurer may ask for updates or an exam by its own doctor. Respond quickly and keep copies of everything.

How long do you have to wait before benefits start coming in?

The waiting period, also known as the elimination period, is the time you must wait after becoming disabled before you start receiving long-term disability (LTD) benefits. This period typically ranges from 30 to 180 days, depending on your policy.

During this time, you’ll need to rely on other sources of income, such as savings, sick leave, or short-term disability benefits. The length of the waiting period is a crucial factor to consider when selecting a policy, as shorter waiting periods usually come with higher premiums, while longer periods result in lower costs but delay the onset of benefits.

Are long-term disability insurance payments taxable?

It depends on who paid the premiums and how:

• Your Employer Paid: Your benefits are usually taxable.
• You Paid Before Taxes: If the premiums came out of your paycheck before taxes, your benefits are usually taxable.
• You Paid After Taxes: If you paid with money you'd already paid tax on, including an individual policy you bought yourself, your benefits are usually tax-free.
• You Split the Cost: Part of your benefits may be taxable.

Some employers let you choose to pay tax on the premium now, so your benefits would be tax-free later. Ask HR if that's an option. A tax professional can help you understand your own situation.

How long do I get my benefits once they’re approved?

“Benefit duration” refers to the length of time you will receive long-term disability payments once you qualify for them. This period can vary widely depending on the terms of your policy.

Some plans may provide benefits for a set number of years, such as 2, 5, or 10 years, while others may continue until you reach retirement age, often around 65. The longer the benefit duration, the more expensive the policy tends to be. It’s important to choose a duration that aligns with your financial needs and retirement plans, ensuring you have sufficient income support for as long as you might need it.

What happens if my long term disability claim is denied?

If your claim is denied, don't panic. You can appeal. That usually means sending more medical proof, explaining your situation, or fixing mistakes from your first claim. Read your denial letter carefully. It must explain why you were denied and how to appeal.

If your LTD is through your job, a federal law called ERISA usually applies. Here's what that means:

• You get at least 180 days to appeal a denial.
• You usually must go through the insurer's appeal process before you can file a lawsuit.
• Your appeal may be your last chance to add evidence. If you later go to court, the judge often looks only at what's already in your file. So send everything you have, like medical records, doctor's letters, and statements about how your condition affects your daily life.

If you bought your own policy, your state's insurance laws apply. You can also file a complaint with your state's insurance department.

It's often worth talking with an attorney who handles disability insurance claims. Many work on a contingency basis, so they only get paid if you win. 

How is long-term disability insurance different from TDI and workers’ comp?

Long-term disability insurance, temporary disability insurance (TDI), and workers’ compensation all provide financial support if you’re unable to work due to a disability, but they differ in key ways:

• Long-term disability insurance (LTD): Covers disabilities that last for an extended period, usually after a waiting period of several months. It applies regardless of whether the disability is work-related or not.
• Temporary disability insurance (TDI): Provides short-term benefits, typically for up to six months. It’s meant for temporary conditions and is often provided by state programs.
• Workers’ compensation: Covers only work-related injuries or illnesses. It provides benefits for medical expenses and lost wages but doesn’t apply to disabilities that occur outside of work.

How does long-term disability insurance work with other benefits?

If you qualify for other benefits, such as Social Security Disability Insurance (SSDI) or Veterans Affairs (VA) disability benefits, your long-term disability insurance may interact with these programs:

• SSDI: Many LTD policies are designed to integrate with SSDI benefits. If you receive SSDI, your LTD benefits might be reduced by the amount of SSDI you receive. This is known as an “offset” provision.
• VA disability: VA disability benefits generally do not affect your LTD benefits, allowing you to receive both in full.
• Other insurance: If you have multiple disability insurance policies, one policy may reduce its benefits based on the amount you receive from another, depending on the terms of your policies.

How can I customize my long-term disability plans?

Your long-term disability insurance isn’t set in stone — you can often customize it with optional riders and add-ons. For example, a cost-of-living adjustment (COLA) rider increases your benefits over time to keep pace with inflation. The future purchase option allows you to boost your coverage later without more medical checks as your income grows. Other riders can cover partial disabilities or specific situations not included in standard policies.

Though these options may increase your premiums slightly, they offer added flexibility and peace of mind as your needs change.

Not sure what you qualify for?

If you're dealing with a disability, other programs may help too. These include SSDI, SSI if your income and savings are low, VA disability if you served, and your state's temporary disability program if you have one.

To learn more about all the benefits available to you and your family, sign up now for BenefitKarma!