Long-Term Disability Insurance: What You Need to Know
5 min read
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.
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What is long term disability insurance?
Long-term disability insurance is designed to replace a portion of your income if you become disabled and are unable to work for an extended period — typically more than six months.
Unlike short-term disability insurance, which covers shorter periods, LTD insurance kicks in after you’ve exhausted other benefits, such as sick leave and short-term disability.
How much can you get from long term disability?
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.
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:
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.
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.
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.
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.
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.
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.
Are long term disability insurance payments taxable?
The taxability of long-term disability benefits depends largely on who pays the premiums and how they are paid. If your employer pays the premiums and does so with pre-tax dollars, the benefits you receive will generally be taxable.
However, if you pay the premiums yourself with after-tax dollars, the benefits are typically tax-free. Consulting a tax advisor can help you understand the specific tax consequences based on your policy’s structure.
What happens if my long term disability claim is rejected?
If your claim for long-term disability benefits gets denied, don’t panic — you’ve still got options. You can appeal the decision, which usually means sending in more medical evidence, clarifying your situation, or fixing any mistakes from the original claim.
Time is of the essence here since appeals often have strict deadlines, so you’ll want to act quickly. It might also be worth getting an attorney who specializes in disability insurance to help you navigate the process and boost your chances of success.
Knowing your rights and understanding the appeals process outlined in your policy can make a big difference in getting the benefits you deserve.
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.