Learn why long-term disability insurance is the most cost-effective way to protect your income in cases of illness or injury.
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? Long-term disability insurance provides the most comprehensive and cost-effective form of income protection compared to workers' comp, short-term disability insurance, or Social Security disability insurance.
Long-term disability insurance is worth having for nearly every worker. Find out why, along with:
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:
There are also some more complicated, but important, terms, like:
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.
Learn more about how disability insurance works.
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.
In general, disability insurance costs are determined by:
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.
Learn more about how much long-term disability insurance costs.
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 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:
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.
There aren't a lot of options that can adequately replace LTD benefits. 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:
Workers' compensation While most people will have workers' comp coverage through their employer, it shouldn't be considered a replacement for a thorough long-term disability policy.
Learn more about your state's workers' comp rules.
Short-term disability insurance Short-term policies can complement a long-term policy, but it's not the most cost-effecitve way to protect your income. Learn more about short-term disability insurance in the following section.
Social Security disability insurance Many people don't buy a private disability policy because they think Social Security disability insurance (SSDI) will provide adequate coverage. Unfortunately, SSDI has strict acceptance guidelines and many applicants are rejected.
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.
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.
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.
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. 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.
Learn more about if short-term disability insurance is worth it.
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.
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!
About the author
Colin Lalley is the Associate Director of SEO Content at Policygenius in New York City. His writing on insurance and personal finance has appeared on Betterment, Inc, Credit Sesame, and the Council for Disability Awareness. Colin has a degree in English from the University of North Carolina at Chapel Hill.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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