Long Term Disability Insurance Explained

Long Term Disability Insurance can be a difficult thing to navigate. But, it is a key component to have in place just in case. Do you know what would happen to you and your family if you became disabled? If it isn't crystal clear than read on...

The majority of us are used to short term disability insurance as it is something we use more often and is typically provided through our employer. Whether or not it's a benefit provided by your employer, I recommend a three-to-six-month emergency fund that will help you self-insure for short term disability costs and time periods. When it comes to long term disability insurance, there are three very specific reasons to have it in place you may not have considered:

1. You are disabled long term but not forever

You have a disability for a longer term than short term disability insurance covers and need help to get back on your feet and work.  It's simply stage 2 of disability coverage but isn't indefinite.

2. You are disabled and unable to do the same kind of work

You have a disability that is not life-long but removes you from the type of work you used to do. So, for example, you work for a radio station as a radio disc jockey, but you lose your voice, it will probably be quite difficult for you to still do radio. In situations where you can no longer work in the same capacity, the question then becomes “what do you do?” The answer could be long term disability insurance with a special feature.  More about this below.

3. You are disabled for the rest of your life

This is for the catastrophic circumstance. This would be if you were injured in such a manner that you could not work for the rest of your life, whether a physical injury or something else like depression. In the situations where you are unable to work, long term disability insurance replaces your income either until retirement or for the rest of your life, depending on the policy. So, what does long term disability look like? How much does it pay and when does it start paying out? Let’s say you were injured on the 1st of the month. You’re not going to see the doctor that day, necessarily. It could take a week, for example, before you can get into the doctor’s office, which would place your appointment on the 8th. So, on the 8th let's say, the doctor declares you disabled. That is when the elimination period begins.  More about this below. Based on an elimination period of 30 days, you wouldn’t receive a paycheck until the 7th the following month. What does that mean? You’ll have to cover your own butt from the 1st of the current month to the 7th of the following month. No payment comes until after your initial doctor visit and the elimination period has passed. That is why it is so important to have an emergency fund in place! Now, when you do receive that check, it is going to be for whatever that policy amount stipulates. If your benefit (% of pay) is 50% and your gross pay is $4,000 a month, you are going to get a check for $2,000 for every month you are disabled. Thus, it is key to have that long term disability insurance in place. So, what should you look for in a long term disability insurance policy?

1. Percentage of Pay

Aim for a benefit near 70% of your pay. Why? If you are paying the premiums on your long term disability policy, which you’ll often see on your paystub as an after tax deduction, then the benefit of your long term disability policy is non-taxable. What does that look like? Well, for example, if you are making 100% of your pay then you are really coming home with about 70% after taxes. So, a non-taxable disability check of 70% of gross pay . is pretty close or equal to the net income you bring home after taxes. It is hard to find a policy that offers 70%, but don’t let that stop you from trying because it really could make a big difference. Either way, get as close to 70% as possible.

2. An Elimination Period is a “time deductible” you have to eat before a check is cut. Aim for one equal to your emergency fund.

If you only have a $1,000 emergency fund, then you are probably going to have to pick a 30-day elimination period because you can’t afford to financially stretch much longer. However, if you have a 3 to 6 month emergency fund in place, then you can afford to have a longer elimination period, which in turn means lower rates on your long term disability insurance and lower payments.

3. Own Occ – Coverage for if you are unable to perform the majority of duties required for your own occupation

This is something you can add to your long term disability insurance as it covers you in case you lose the ability to do what you used to do. It covers you until you can learn a new career and get back into the workplace, making this a great feature to have in place! Long term disability insurance isn’t a luxury; it is a necessity. If it isn’t something you have in place, don’t delay. Find a good broker and get a policy. It is something people tend to put off for years. That can be dangerous and detrimental to you and your family’s quality of life during an already difficult time. Get something in place to protect yourself, your family, and to keep your wallet heavy and your heart light. Question: What has been holding you back from getting this protection in place for your family?  Share in the comments below!