For most people, shopping for private long-term disability insurance is a foray into uncharted waters. If they've had any experience with disability insurance, it's likely been through an employer, and probably involved short term coverage.
And while it's true that long-term disability insurance is a little more complicated to evaluate than, say, renters or pet insurance (which are even easier to shop for if you follow our renters and pet guides), it doesn't have to be overwhelming. In fact, it shouldn't be. If it is then you're probably overthinking it.
To find the right long-term disability insurance without driving yourself crazy in the process, there are two things you should do.
First, figure out how much income you need to replace. A good rule of thumb is to get a policy will cover 60% of your current salary (the maximum you can get is typically around 60-70%). If you pay the premium on your long-term disability policy, then those benefits aren't taxed. So that 60% coverage amount will roughly match your current take-home pay. You can always scale back that percentage if you have enough cash savings to help defray your monthly expenses a year or more, but be conservative when looking at your savings; the average duration of a long-term disability claim is over 2 1/2 years, so a standard 6-month emergency fund probably won't go very far.
Next, you should quickly scan the policy to check for the following features and add up how many points it earns. Then you can compare policies not just by price but by feature score.
If you keep this list with you as a cheat sheet when shopping, you'll know how to choose a good LTD policy in 5 minutes—and dramatically reduce any confusion or frustration in the process.
How to choose a long-term disability policy in 5 minutes
14 POINTS - It should be non-cancelable.
This is a must-have for a policy to be of any real value to you. This means the insurer can't cancel the policy or change the terms—including the premium—as long as you keep paying. You should buy long-term disability insurance when you're young and healthy because you'll find the best prices and will be covered for more of your career. A non-cancelable policy means you'll be able to keep the policy at the same low premium years from now.
14 POINTS - It should be an "own occupation" policy.
Another must-have. This means that it will pay benefits if you can't work in your _regular _occupation. By contrast, "any occupation" policies are cheaper but less useful, because they will only pay if you're unable to gainfully work in any occupation that's suitable given your training and experience. That means if you can no longer work as (for example) a surgeon, but can teach, you probably wouldn't qualify for disability benefits. (But you'll still have to pay that massive student debt you built up by going to med school.)
4 POINTS - It should have a 90 day elimination period or longer.
The way long-term disability works is, if some sort of disability leaves you unable to do your job, the benefits won't be paid until a month or more has passed. (This is why it's good to have a short term disability policy—usually bought cheaply through your employer— or emergency savings to see you through this initial period.) Ideally you want to avoid a gap in benefits, because if your short term coverage ends before your long-term elimination period is over, you'll face one or more months without any income. You can shop for policies with longer elimination periods to save money, but make sure you have enough cash savings to cover the full elimination period (and remember that disabilities usually come with unexpected medical costs). Avoid policies with shorter elimination periods; they are too expensive to justify the extra month or two of income.
4 POINTS - It should have a "residual benefits" option.
With this feature, if your disability prevents you from working full time but you can still work part time, you'll still receive partial benefits. Usually, the disability must result in an income loss of at least 15-20% before you're eligible for benefits. There's a caveat to this one, though, so check the fine print on this option before you assign points for it: Some policies add a condition that says you have to first be totally disabled before becoming partially disabled, which makes it much harder to claim this benefit.
4 POINTS - It should offer a benefit period of at least 5 years, but preferably longer.
Some policies will pay you a benefit up to age 67, so even if you become disabled at age 30, you'll be covered until your retirement benefits kick in. Some cheaper policies, however, will pay for as little as 2 years, which won't even cover the duration of the average disability. A period of 5 years would be good value coverage.
1 POINT - It should have a "future increase" option.
This option lets you bump up the amount of coverage periodically without having to start over from scratch, meaning you can skip the underwriting and medical exam you had when you first bought the policy. This is a great feature to have if you buy long-term disability insurance when you're young, because the odds are your salary will rise over time, so you'll need more coverage.
1 POINT - It's nice to have a cost of living adjustment (COLA) option.
If you find yourself disabled for more than a few months, there's a good chance that the rising cost of living will reduce the value of your benefit over time. A COLA option will protect you from this by annually increasing the benefit amount to adjust for inflation.
1 POINT - It's nice to have an "unemployment waiver of premium."
While not necessary, this is a nice extra layer of protection. It means if you become unemployed, the insurer will waive your premiums so that you don't lose coverage while you find another job.
30 or more points = worth checking out
20 or more points = okay but not great
less than 20 = avoid
We talk about these features and more in the PolicyGenius Guide to Long-term Disability Insurance, so be sure to check that out too.
And remember, if you're stuck at square one where you know this is a critically important type of insurance to have, but you have no idea how to get started, take our free PolicyGenius Insurance Checkup. In 5 minutes it will give you clear, honest advice on the steps you should take to get yourself fully covered.
Photo credit: Kristina Alexanderson