Long-term disability insurance is income protection for when you can’t work for a long period of time — many months, years, or even decades. Most insurance products like life insurance and auto insurance typically pay out one lump sum when a claim is filed, but long-term disability insurance is different in that it pays out over a long period of time. The benefit payment period could be years or even decades, depending on your policy.
Read on to find out:
When you are applying for long-term disability insurance, there are two things you need to decide: the length of your elimination period and the length of your benefit period.
The elimination period, also known as the waiting period, is how long you have to wait after a disability in order to start receiving benefits. Elimination periods can be 30, 60, or 90 days, or even 6 months or a year.
The benefit period is the period of time that benefits are paid out. You could choose a plan that pays out benefits for two years, five years, ten years, or until retirement.
Choosing the length of each term is a combination of your own financial situation, what other insurance products you have, and what you can afford.
Before you know when your benefits will end, you have to know when they’ll start! And they won’t start until after the elimination period, the time you have to wait before your long-term disability insurance benefits kick in. You need to remain disabled for the entirety of the elimination period in order to receive benefits.
This ensures that your disability really is long-term and that making a claim on your long-term disability insurance is appropriate for the situation. Also important, to your insurer at least, is that your long-term disability benefits don’t overlap with any short-term disability coverage your have.
Most elimination periods last between 30 days and a year. Your specific elimination period will depend on what you choose when applying for long-term disability insurance.
What’s the right elimination period length for you? It depends on how much you want pay for premiums, and how long you can afford to go without getting paid.
The main reason to choose a shorter elimination period is if you have a lot of expenses that you know won't be able to be met without continuing to get some income. The catch-22 here, however, is that the shorter the elimination period, the higher the premiums, so if money is truly tight, you may not be able to afford that peace of mind.
A longer elimination period means lower premiums, and your premium rate is something you should be aware of with any type of insurance policy. If you can only afford so much for long-term disability insurance, you may need to go with a longer elimination period.
You should find the right balance of premium payments versus elimination period length that works for you. Most long-term disability insurance policies are the most cost-effective with a 90 day elimination period, so opting for a longer elimination period likely won’t be worth it. Also important to note: long-term disability insurance benefits usually won’t pay out until the end of the month; depending on when you’re approved, you could be adding another 30 days or so before you actually get any benefits.
The longer the elimination period, the longer you’ll need to find other ways to replace your lost income. Without a paycheck or long-term disability insurance benefits, you’ll need to turn to sources like credit cards, loans and other debt, the charity of friends and family, short-term disability insurance (if you have it), and more severe budget cuts than you were planning. What compromises you’re willing to make in order to make payments in your life will contribute to your decision about the elimination period.
One way to at least somewhat circumvent this dilemma is with an emergency fund. There isn’t a set amount of emergency funds that you should have set aside — personal finance experts typically recommend anywhere from 3 months’ worth of expenses to a full year — and the size of your emergency fund can dictate how long to make your elimination period. You’ll have to rebuild your fund at some point afterward, but you won’t have to worry about things like racking up credit card bills, defaulting on payments, or paying others back. It’s the perfect use case for an emergency fund: money whose explicit purpose is covering your expenses while you don’t have income.
Once you’ve made it through the elimination period and start to get long-term disability insurance benefits, your income is protected and you’ll have money coming in so you can pay bills even when you can’t work.
The benefit period – how long your benefits will last – is perhaps the most important decision you’ll make when applying for long-term disability insurance. After all, what’s the point in paying for it if you’re not going to be able to use it when it’s needed?
Most long-term disability insurance policies pay out for two, five, or 10 years, or until retirement, and a five-year benefit period is typically enough to cover people; according to the Council for Disability Awareness, the average individual disability claim lasts for a little under three years.
But because five years will cover most people, the cost of long-term disability insurance isn't much higher for longer benefit periods. That means that applying for a policy that will last you until retirement won’t cost much more per month, and you get the added benefit of peace of mind in the event (knock on wood) that your disability lasts longer than expected.
Having long-term disability insurance cover you until retirement age is particularly good for certain professions. Specialty professions that rely on a particular set of skills, like doctors, dentists, or nurses who need fine motor skills for procedures, benefit from until-retirement long-term disability insurance as a safeguard against future income loss if their disability prevents them from using those skills.
Additionally, professions where you’ll have accrued a lot of debt – again, like doctors with medical school debt – can benefit from from long benefit periods so you can still pay off your debt even if you can’t continue in your expected career (with the associated salary to pay off that debt).
If you can afford the modest rate increase, springing for a long-term disability insurance policy that will last until retirement is a good option.
Whatever you opt for in your specific policy, make sure you understand exactly how long your long-term disability insurance benefits will be in place. If you reduce the potential for unknowns, it’ll make a difficult time go that much smoother.
Logan Sachon is the co-founder of The Billfold, a groundbreaking personal finance site for millennials that was named one of Time's 25 Best Blogs of 2012. Her work has been published in New York Magazine, Glamour, The Guardian, BuzzFeed and more.