Here's how to save on long-term disability insurance
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Imagine you're 25 and working at your first "real" job. You're trying to put together a solid financial plan to serve as a foundation for the years to come, so among other things, you're looking at insurance products and figuring out what you need. You take a look at long-term disability insurance and weigh the pros and cons: LTD pays a portion of your salary if you're unable to work for an extended length of time due to a disability, but do you really need that kind of protection right now? You're pretty healthy and you take care of yourself. Is it worth adding a monthly LTD premium to your already limited budget?
Most 25-year-olds at this stage of their career wouldn't. This is an argument for why they should.There are plenty of good reasons to kick LTD down the road and revisit it when you're older.The most obvious is money: when you're young, you have a lot less money to work with, so you look for reasons to cut expenses from your monthly budget. To a young and healthy person, LTD can look like something you'll need later in life, when there are mortgages to pay and kids to put through school.There's also a general confusion about what LTD is and what it does, and Google doesn't help matters. If you search for LTD information the odds are you'll see results for "long-term care"—LTC—mixed in among the LTD entries. It's easy to go looking for answers and end up more confused than when you started.Then there's the whole "I'm young and healthy" bias that each of us goes through at this stage of life, often for good reason. The risk of being disabled for 6 months or more is a lot lower in your 20s than in the years that follow. The statistics may show that the odds of being disabled are higher than you probably think, but that doesn't make much of an impact on your day to day life. Sure, you might need LTD in the future, but probably not in the immediate future.So what are the reasons for buying it? There are two big ones.First, it means your premiums will be locked in at a lower rate, which is a great thing as you move through your 30s, 40s and beyond. Try buying an LTD policy in your 40s and you might end up looking at a monthly premium the size of a car payment.
But there's another benefit that's even more important, which is that it means you'll have a policy with better coverage than if you wait until you're older to buy.An LTD policy that you already own will come in handy if something serious sidelines you for half a year in your mid-30s. But if you wait to buy a policy after that, not only will you have missed a chance to take advantage of it, it probably won't cover any future health issues that are similar to ones you had before buying the policy. Insurers usually exclude any health issues that could be caused by a pre-existing condition.Sometimes, if your medical history is really "interesting" or if you've reached a certain age, you simply won't be able to find a policy no matter how much you're willing to pay, because the insurer will consider your situation too risky to insure.
It's easy to see how dramatic the difference can be with a hypothetical scenario:
Melanie is a 25-year-old software engineer in good health. She buys a long-term disability policy now, while she's still young and healthy. The policy will start paying her a monthly, tax-free benefit 90 days after she becomes disabled, and will keep paying for as long as she’s disabled up to age 65.There are no exclusions added to the policy, other than the default ones that apply to everyone (like self-inflicted injuries or disabilities due to war).The policy also comes with a guarantee that (a) the insurer can't raise the premium so long as the policy remains in effect in its current state, and (b) the insurer can't cancel the policy as long as Melanie keeps paying the premiums.For this policy, Melanie will pay $99 a month—and because of the guarantees listed above, this rate will stay the same for the next 40 years unless Melanie asks the insurer to increase the benefit amount. (Not all LTD policies let you increase the benefit amount over time, but Melanie’s does.)
Melanie's policy is pretty much the gold standard for long-term disability insurance. It has everything you'll look for when you shop for one:
the maximum benefit amount for your salary;
a benefit period that lasts until retirement, regardless of when it starts;
a promise to pay even if you start working again so long as it's in an unrelated field;
protection from premium increases and policy cancellation; and
multiple opportunities to increase the benefit amount in the years to come.
It's easier for the young and healthy to get a policy this packed with features. It's far more difficult for people who are older.That's the good part of Melanie's story. Unfortunately, because she's a case study for us, we're going to put her through some tough times in terms of her health. When Melanie is 29 years old, she starts having problems with her digestive track and goes to her doctor, where she learns that she has Crohn's disease.Crohn's flare-ups come and go, and throughout her 30s Melanie occasionally misses work for short periods—more than a couple of days but not long enough to trigger even short-term disability. However, when she's 40, Melanie has to undergo surgery because of the damage Crohn's has caused, and complications from that surgery prevent her from working for 6 months.Fortunately for Melanie, the LTD policy she bought when she was 25 covers her after her short-term disability runs out, so for the remainder of her recovery period she receives the tax-free $4,000 monthly benefit. In addition, Melanie returns to work confident that if something like this happens again she'll still be covered.
Now let's look at the same scenario, but this time around Melanie waits until she's 45 to shop for LTD insurance.Melanie decides in her 20s to forego a long-term disability policy right now—she's still got student loans to pay off, and she hasn't exactly met her earning potential yet. She makes a promise to herself that when she's older and better able to afford a monthly payment, she'll buy some LTD coverage.
At 29, the same health scenario plays out: diagnosed with Crohn's, periodic flare-ups through her 30s, surgery at 40, complications that prevent her from working for 6 months, and employer-sponsored short-term disability for the first 90 days. After those 90 days end, Melanie taps into her savings to cover the remaining 3 months that she's out of commission.That 3 month stretch without any income, and with the burden of unexpected medical expenses in addition to her regular bills, knocks her retirement savings strategy off course a little, but the damage isn't too severe. She figures she can get back on track by tightening her budget a little over the next couple of years.But now Melanie wants protection if something like this happens again, and this is where the problems start. She's able to find some LTD policies that will cover her, but they all come with the stipulation that anything related to her previous medical conditions will be excluded, which makes the policy a lot less useful for Melanie's particular situation. In addition, the limited coverage it does provide comes at a considerably higher monthly cost than she expected, especially on her new budget. And on top of that, the benefit period offered to her is much shorter than what she could have gotten at 25: only 5 years instead of up to age 65.
Finally, in our example—which uses actual quotes—if we assume Melanie keeps the policy until she turns 65, she would save about $7,500 in premiums if she buys when she’s 25 instead of 45. Not only that, but she’ll have saved herself from some big expenses from the medical issues she faced in her mid-30s."Crohn's sounds pretty terrible, but I don't think I'm likely to have that experience," you say. We actually see other more common health issues all the time in middle-aged applicants—and they're always surprised by how much a seemingly small issue like sleep apnea or back pain can drive up the cost of a policy.
Long-term disability seems like a "nice-to-have" layer of protection when you're young, and in many ways it is. It's more likely that if you need it at some point, you'll need it when you're 37, not when you're 27. But LTD insurance doesn't age well; the longer you wait to buy it, the more expensive and less comprehensive it will be. As far as financial protection goes it's easy to overlook the value of LTD before you turn 30. But, should something happen ten or fifteen years down the line, it can make the difference between paying your bills and filing for bankruptcy. And no matter what your current age is, it will never be cheaper for you than it is today.
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