What is long-term disabiliy insurance?
Long-term disability insurance is essentially insurance for your income. If you become sick or injured, you may be forced to miss work. Health insurance will only cover the cost of some of your medical procedures and recovery, but can’t help pay other bills. If you’re unable to work and can’t receive a paycheck, you run the risk of missing payments on your mortgage, utilities, or other bills.
There are several things to consider when deciding on which is the best long-term disability insurance policy for you. Some important terms to know are:
- Coverage amount – The amount of money your insurer will pay to you. It is recognized as a percentage of your gross income. A typical benefit amount is 60% of your gross income. Also known as the participation rate.
- Waiting period – How long after you become disabled before you will begin receiving benefits. Typical waiting periods are 30, 60, 90, 180, or 365 days. We recommend waiting a period of 90 days for the most cost-effective policies. Also known as the elimination period.
Benefit period – The amount of time you will receive benefits. Typically benefit periods are two years, five years, ten years, or until your retirement. Because the average disability lasts around three years, we recommend at least a policy with a five-year benefit period. A benefit period that extends to age 65 offers full protection and is the most common policy.
A policy that is non-cancelable means that the insurer can never legally change the terms of the policy, including the premium.
- Own occupation –
An own occupation policy will continue to pay out if you can’t work in your designated job, even if you are able to work elsewhere in another capacity.
- Exclusions – Exclusions limit what will be covered by a long-term disability policy. These are often pre-existing health conditions (for example, a policy may exclude certain pre-existing back ailments) but may also include potentially risky hobbies like skydiving.
The difference between short-term and long-term disability insurance.
While researching long-term disability insurance, you may have come across short-term disability insurance. What’s the difference between short-term and long-term disability insurance?
The main difference between the two products is how long they last. Short-term disability insurance lasts for a shorter period of time, usually starting at a few months and no longer than a year. Your long-term disability insurance will not begin until any short-term disability benefits have been exhausted. Long-term disability insurance, on the other hand, can last until your retirement.
Private Short-term disability insurance policies are available, but short-term disability insurance is usually only cost effect through an employer.
Other alternatives to short-term and long-term disability insurance are Social Security disability insurance (SSDI), self-funding via an emergency fund, workers comp, or relying on friends and family for financial support. However, these are imperfect options that may not be feasible for covering the cost of a multi-year disability; for example, Social Security disability insurance is difficult to qualify for and may be limited compared to your coverage needs.
How much does long-term disability insurance cost?
Average long-term disability insurance rates cost between 1-3% of your annual salary, but the exact cost will depend on a number of factors about the applicant and the policy chosen.
- Age – The older you are, the more expensive your policy.
- Gender – Women make more disability claims and therefore pay more for policies.
- Smoking history – Smokers or recent smokers will have more expensive policies.
- State of residence – Residents of states with a higher number of disability claims will pay more for policies.
- Occupation class – Depending on elements of your job (including manual duties, travel, and more) you may be classified as having a “riskier” occupation and pay more for your policy.
- Coverage amount – Higher coverage amounts result in higher premiums.
- Benefit period – Longer benefit periods result in higher premiums. The most cost-effective benefit period is five years, but full coverage extends to age 65.
- Waiting period – Longer waiting periods result in lower premiums. The most cost-effective waiting period is 90 days.
- Built-in policy features – Some features like own occupation coverage may come standard in policies from some carriers and may affect the cost of the policy.
- Riders – Additional feature that don’t come standard may raise the cost of the policy.
Most disabilities are caused by illness rather than injury, which means that disability insurance can provide a financial safety net for everyone. But what is the best disability insurance company for you? It largely depends on the policy cost and features that work for your individual situation. However, some insurance companies are best for certain professions, offering the best prices or most flexible options. Learn more about the best disability insurance companies for your profession: