Updated January 3, 2018
Did you know one in four workers will become disabled before they retire? How will you achieve your financial goals if you can’t work? With long-term disability insurance. Disability insurance provides income replacement if you become sick or injured. Find out whether or not it’s worth it for you.
What is long-term disability insurance?
Long-term disability (LTD for short) is a relatively straightforward product that does what it says: it protects you during lengthy periods of disability when you're unable to work. It's often described as income replacement insurance, because during the disability period when you're not getting a paycheck, your long-term disability insurance will pay you a monthly amount. If you get a good policy, the amount will come close to your take-home after taxes.
While the name of long-term disability insurance is straightforward, some of the terminology can be confusing. First the easy terms:
The elimination period is how long you have to be disabled before the benefit will kick in. LTD insurance is structured on the assumption that if you're disabled for a short period of time, either you'll rely on your own cash savings or you'll have a short-term disability policy to cover you.
The benefit period is how long you'll receive monthly payments. Some LTD policies have benefit periods as short as a couple of years, while others will keep paying until you reach retirement age, even if that happens to be several decades from now.
The benefit amount is how much you'll get paid each month. The amount varies but is never more than about 60% of your pre-tax monthly salary.
An exclusion is a specific condition under which the disability won't be provided (can be because of a pre-existing condition or a certain dangerous activity or hobby).
And now the weirder terms:
- Non-cancelable does not mean "your policy won't be canceled." Instead, it means the premium on your policy won't be increased in the coming years.
- Guaranteed renewable actually means "your policy won't be canceled." Yes, even though the word "cancel" is already in use elsewhere, sigh. Anyway, the better policies are both non-cancelable and guaranteed renewable, so if you forget which is which just remember that you want both.
- Own occupation is how the industry refers to your chosen occupation—the one you trained for or have built a career in. The best policies will only look at whether you can work in your own occupation after a disability, not whether you can get a job anywhere. But there are a lot ways to customize a policy when it comes to this term, so we've written a detailed guide to own occupation that you should bookmark and come back to if you decide to shop for LTD.
How does long-term disability insurance work?
You can request to receive up to 60% of your gross monthly income while you're disabled, but this can make a policy expensive, and might be unnecessary if you have an emergency fund or other savings. Ideally, you should see where you can cut spending in your budget and get the lowest amount of protection you need so you can get an affordable policy.
The length of the benefits depends on the policy, too. You'll have to wait for the elimination period to end, which is basically a waiting period before your benefits start -- usually between a month and a year. Most long-term disability policies last for 2, 5, or 10 years, or until retirement.
How much does long-term disability insurance cost?
The benefit amount and length determine the cost of your long-term disability policy. You should aim to spend between 1-3% of your annual salary for your long-term disability insurance, so keep that in mind when you're shopping.
You can find a full breakdown of how long-term disability insurance rates are set here, but in general costs are determined by:
- A base rate based on your age, gender, smoking history, state of residence, benefit period, elimination period, and policy features.
- Your occupation class.
- The coverage amount.
- Any additional riders you add to customize the policy.
Here are hypothetical rates for $5,000 monthly benefit policy for a software engineer in New York at ages 30, 40, and 50, showing how disability insurance rates can vary by age and carrier.
|Company||30 years old||40 years old||50 years old|
|Ameritas||$110.76/mo | $1,281.40/yr||$176.76/mo | $2,048.80/yr||$271.65/mo | $3,152.20/yr|
|Assurity||$125.90/mo | $1,447.29/yr||$211.45/mo | $2,430.35/yr||$281.55/mo | $3,236.39/yr|
|Guardian-Berkshire||$132.09/mo | $1,585.13/yr||$201.87/mo | $2,422.50/yr||$305.69/mo | $3,668.26/yr|
|MassMutual||$105.19/mo | $1,237.20/yr||$162.26/mo | $1,896.88/yr||$260.81/mo | $3,036.20/yr|
|Mutual of Omaha||$126.80/mo | $1,449.00/yr||$190.48/mo | $1,896.88/yr||$291.59/mo | $3,332.41/yr|
|Principal||$136.68/mo | $1,562.00/yr||$206.02/mo | $2,354.50/yr||$304.54/mo | $3,480.50/yr|
|The Standard||$127.51/mo | $1,457.30/yr||$184.84/mo | $2,112.47/yr||$276.88/mo | $3,164.31/yr|
When you're looking for long-term disability insurance quotes, keep this in mind so you have an idea of how the rates are being set. A licensed expert can help you figure out how any of the following criteria are affecting your rates.
What alternatives are there to indivdual long-term disability insurance?
There aren't a lot of options that can adequately replace LTD benefits. This isn't part of a sales pitch, just reality. Alternatives to your own long-term disability insurance policy include:
Long-term disability insurance through your employer
Your employer may offer group long-term disability insurance as a benefit. Here's what you should consider before you get it:
Pros: It's easy to qualify for, and it may be provided at no cost to you.
Cons: There are a few caveats. First, the coverage probably isn't adequate, and you'll need to supplement it with a private disability policy. Second, like other benefits, it's tied to your employment, so if you go elsewhere you'll lose the policy. Third, employer coverage can affect what level of individual coverage eligible for.
You tap into your emergency savings, then optionally (depending on how long the disability lasts and the size of your emergency savings) your revolving debt accounts and your retirement accounts.
Pros: It saves you from paying a premium on LTD insurance every month for the rest of your remaining working years.
Cons: It's a riskier strategy than buying insurance. You gain immediate savings by not having to pay any premiums but risk financial hardship later if you become disabled.
Family or other support
If you can't work, someone close to you—a parent, a sibling, etc.—steps in to cover your bills and living expenses. This is the de facto "strategy" most people end up using, simply because it's the fallback solution if you don't do any sort of advance planning.
Pros: It requires little to no upfront planning.
Cons: It puts your financial burdens on others. It also requires that you have people in your life who can meet this obligation.
Do I need short-term disability insurance?
There's also short-term disability, which isn't actually an alternative to LTD (many people have both) but another tool you can use.
Short-term disability starts paying soon after you become disabled, and stops after a few months. If you're disabled for six months or less and have short-term disability insurance plus some emergency savings you can use, you may be fine, financially speaking.
Pros: It's cheaper than long-term disability (sometimes it's even covered by your employer). It still provides some protection against income loss.
Cons: If your disability lasts longer than the short-term benefit period, you're on your own, and will probably have to fall back on one of the two options listed above.
In a perfect world, you will have enough money on hand to self-insure, and maybe for good measure you'll throw in some cheap short-term disability. In the real world, odds are high you can't self-insure, especially considering how expensive medical care is even if you have health insurance. This means buying LTD depends on how much risk you're willing to take on for the duration of your working years.
In particular, there are two things to keep in mind as you weigh your options. The first is that the majority of personal bankruptcies in the U.S. are due to medical expenses, so it's a good idea to find ways to reduce that risk.
The second is that if you have dependents, in terms of priority it's more important to insure against the worst-case scenario, which is that you die while they're still dependent upon you. For that you need basic term life insurance. (See our article "Is term life insurance worth it?" for more details.) After that's taken care of you can address the disability issue. On the other hand, if you don't have any others to financially protect, you'll probably want to consider disability insurance first and life insurance second.
What's good about long-term disability?
The strongest argument in favor of long-term disability is that it dramatically reduces the risk of financial trouble if you become disabled for 6 months or more at some point during your career. Here are some other good things about it.
There are no restrictions on how you can use the money. It's treated like a substitute for your regular monthly income, and comes with no strings attached.
You don't have to pay it back or pay any interest or penalties on it.
It's tax free. More precisely, since you pay for the premiums with after-tax dollars, the monthly benefit isn't also taxed.
It can last a long time. The best policies have benefit periods that last until you reach retirement age. That means if something serious happens that derails you from your chosen career when you're young, it's possible to have a policy that will pay a monthly benefit for decades. This can be especially useful if you have a huge amount of student loan debt to pay off and find yourself unable to work early in your career.
It protects you from having to tap into your retirement savings prematurely.
What's bad about long-term-disability?
It costs money. If you're lucky, you won't ever be affected by a long-term disability over the course of your career, which means you'll have paid for insurance you didn't use. But then that's the nature of any insurance—you're paying to reduce your risk, not to make money from the policy.
The older you are, the less comprehensive a new LTD policy's coverage will be, and the more expensive. Pre-existing conditions won't be included, and things that seem unremarkable to you, like sleep apnea or mild depression, can lead to exclusions for other health issues. Basically, the sooner in your career you buy it, the better the policy you can get, both in terms of coverage and cost.
It won't cover everything. Every LTD policy is different, and depending on your income, profession, age, and health, you might run into limitations on what will be covered and how long the coverage will last.
Unlike life insurance, it won't help your family if you die. This isn't really a drawback but it's something to keep in mind when you're putting together a financial strategy and prioritizing your insurance needs.
There are also situations where it can be hard to get a good, cheap LTD policy, meaning you might be able to get a policy with one or the other of those qualities but probably not with both. You should be aware of these situations so you can establish realistic expectations and avoid frustration if you decide to shop for one:
You've just switched careers or you don't have a consistent career history.
You don't have an income that's consistent or that can be reliably documented to the insurer's satisfaction.
You work in a high-risk job.
You're over 40.
You have a history of health issues.
Don't get too discouraged if some of those bullet points apply to you. You may still be able to find a great LTD policy, so don't give up without shopping around first. But generally speaking, the ideal time to buy LTD is when you're young, before you have much of a medical record, and while you're consistently employed.
What are the best long-term disability insurance companies?
There isn't one disability insurance company that's best for everyone. There are a few things you need to take into account.
The first is probably the most obvious: Price. Some insurers offer more competitve rates than others. Long-term disability insurance protects your income, so you want to make sure your policy fits your budget.
Then there are the more service-oriented aspects, like the application process, the customer service experience, and the underwriting process.
Also consider what policy features. Disability insurance companies may offer riders at different costs, so if there are additional features you want, like a return of premium rider, see which company offers them at the best rate.
Your occupation should also determine what company you choose. Some insurers offer more competitive rates for careers like lawyers, CPAs, and dentists, so take that into account depending on your field.
Is long-term disability insurance worth it?
In an ideal world everyone would have it for the simple reason that it reduces the risk of a financial disaster later on.
In the real world, the people who need it most are those who have sunk a lot of time and money into a career and don't want to risk losing that investment. Young professionals who start their careers with significant debt (doctors, for example) should definitely look into it.
It's also a good thing to have if you've got family members to support and you already have some sort of life insurance coverage. Life insurance will take care of them when you die, but long-term disability will help you take care of them while you're alive but unable to work.
While the above is a good primer on long-term disability, its costs, and its alternatives, nothing beats speaking to an expert. Our licensed agents will help you find the policy that's right for your family and your budget, without the pushy sales calls or industry jargon. Or, if you want to give is a spin for yourself, get customized quotes for free to see how affordable it can be and apply when you're ready!