If you've been researching whether long-term disability (LTD) insurance is worth the cost, you may have already come across a statistic from the Social Security Administration that claims one in four 20-year olds will become disabled before the age of 67. Although it may be best to invest in long-term disability insurance at an earlier age, let's keep in mind that anyone, in any age group, could be involved in an accident or develop an illness that prevents them from carrying out their job, whether in full or in part.
What Is LTD Insurance?
As the name suggests, long-term disability (LTD) is an insurance policy that pays for a portion of a worker's salary in the event they are unable to work for an extended period. This type of plan isn't only for those who have high-risk jobs, but for anyone who depends on their salary to provide for themselves or their family. In fact, LTD is often called income replacement insurance because it can replace a substantial portion of an individual's income on a monthly basis. Long-term disability begins when the benefits of short-term disability insurance end, generally after three to six months, and can cover accidents in or outside the workplace, as well as physical illnesses. Some long-term disability policies even cover serious chronic mental illnesses, yet in such cases, most plans only pay out benefits for a limited period. LTD typically pays from 40% to 60% of a worker's salary (tax-free) for as little as a few years or until the individual reaches the age of retirement, which would be 67 for those born in 1960 or later.
Why Don't More People Opt for LTD?
LTD insurance mitigates the cost associated with the risk of becoming ill or disabled, so why aren't more people investing in this kind of insurance policy? One of the main reasons why people take LTD insurance for granted is because they don't believe they are at risk of falling ill or becoming injured, yet accidents and illnesses are more common than we imagine. In fact, the odds of a person becoming disabled due to a disease at some point in their lives is greater than the odds of their house burning down. Furthermore, according to the Council for Disability Awareness, 90% of disabilities are caused by illnesses rather than accidents, and the majority of LTD insurance claims are due to musculoskeletal conditions, connective tissue disease, and cancer. Another reason why people overlook long-term disability insurance is that their employers already provide some other type of accident insurance like workers compensation. However, workers compensation only covers work-related injuries and would just pay out around 5% of the policyholder's salary. Although there is always the option of applying for Social Security Disability Insurance, people should keep in mind these benefits are often hard to qualify for this benefit and payments are limited to a fixed monthly amount, typically between $700 and $1,700, that doesn't take into account the individual's previous income.
What to Keep in Mind
There are a few other details to keep in mind about long-term disability insurance. Although this policy can be an excellent investment, especially for those whose job is their sole source of income, the terms of the policy will be the deciding factor in whether this type of plan will yield any returns in the event of an injury or illness. Typically, long-term disability insurance will cover all non-pre-existing disabilities and cost anywhere 1% to 4% of a worker's annual income, a reasonable price for a plan that provides income protection and peace of mind. Now, the length of time the coverage will pay out benefits will depend on the plan details, which can make or break the deal. According to statistical data, most disabilities last for more than 2.5 years, yet LTD coverages pay out benefits for two years, after which there is a change in definition that redefines the concept of disability. In general, the policy covers the individual for the first two years if he or she cannot perform the job they were hired for, but after the change in definition, the worker only qualifies to continue benefits if they are unable to hold any occupation they may be reasonably suited to do. Again, this last detail is also contingent upon the terms of the selected LTD insurance plan.
All long-term disability insurance policies have different conditions for paying out benefits and have exclusions regarding pre-existing conditions. However, purchasing this type of coverage may still be a wise option depending on who is providing the coverage. In recent years, a growing trend among employers has been to reduce or eliminate employee benefits, making workers shoulder the responsibility of paying for insurance on their own. If your company or employer is offering you the opportunity to enroll in a life insurance or long-term disability insurance coverage, read the plan description and find out what the pre-existing conditions exclusions are, what portion of your salary the plan would pay out, and if there is a change in definition clause that redefines the concept of disability after a certain period. Also, look at the waiting or elimination period to receive benefits, as you may also have to purchase short-term disability insurance to cover you in the interim, that is if it's not already included in your benefits package. In short, read the plan details, do the math, and then think about your future and how much risk you're willing to handle.