Financial Planning

Long Term Disability Insurance – What You Need to Know

Published by Bob Gustafson

Long Term Disability Insurance - What You Need to Know

Healthy people think disability is something that happens to other people. We get up every day and go to work. We are able to care for our family without a lot of stress. But becoming disabled, even for a short period of time, is more common than you may think. This is where you need to have short- and long-term disability insurance.

A disabling condition is something that prevents us from continuing to do our jobs. Common reasons for disability claims include pregnancy, mental health issues and some type of cancer. Having disability insurance coverage is important to protect you and your family in case of an unexpected illness or injury that prevents you from going to work for an extended period of time.

Let’s take a look at what you need to know about long term disability insurance.

What is Long Term Disability Insurance?

According to Investopedia, long term disability insurance is coverage intended to protect your income if you are unable to work due to illness or injury. While short term disability insurance usually lasts a maximum of two years, long term coverage can often last five or 10 years if not all the way through to your retirement. 

Most people focus on having short term disability insurance, which is a good thing. But it’s also important to prepare in case you have an illness or injury that requires a more lengthy recovery. While it’s not often people need this type of insurance, it’s crucial to have it when you do. It protects your income if you find yourself in a position where you’re unable to work for a long period of time due to illness or injury. 

You need an insurance policy that will protect you and help you sustain your current lifestyle for the long term. Some people think they’ll be eligible for social security disability and that may be true. But the amount of money you’d receive won’t be enough coverage for a long-term scenario. Similarly, policies offered through many employers are often weak in terms of coverage amounts

Verify that your employer offers LTD insurance

Check to see if you have long term disability insurance through your employer. If your employer offers an LTD plan, it is very important to sign up during the initial enrollment period. This may prevent you from being denied coverage for a pre-existing condition should one arise.

Understand what long term disability coverage entails

Sometimes you’ll find company policies cover a percentage of your salary per pay period, per month, or another specified period of time. And the amount is typically capped at a certain amount of money. So, it’s important to get a copy of your employer’s policy and determine whether it will work for your personal financial situation.  

For example, if you’re a highly compensated professional, your company’s policy may not sustain the lifestyle you’re used to. Therefore, you may want to purchase supplemental long term disability insurance in the open market. 

Determine if you need a supplemental LTD policy

There are three times you may want to invest in a supplemental LTD policy:

  • Your employer policy doesn’t provide sufficient coverage
  • You are self-employed
  • Your employer doesn’t offer disability insurance

If you do have LTD through your employer, it may only cover you until you are employable again. That means once you’re able to perform any job (even if it’s a much lower paying job than what you had before) you may be denied disability.

Or if you are self-employed or your employer does not provide LTD, you can also consider looking into an individual disability insurance policy.

So, it’s really important you understand the nuances of your long-term coverage. Once you understand what your coverage entails, you can develop a strategy for long term disability coverage that would work for you.

Find out the tax implications of your policy

Lastly, find out the tax implications of your policy. If you’ve developed a strategy that includes both your employer’s insurance and supplemental insurance, you need to understand if the benefit would be taxable or tax-free. Generally, if most of the coverage is provided by your employer, it might be taxable. If you’ve purchased a supplemental policy and that provides the majority of your coverage, then it might be tax free.

For more information about long term disability insurance, listen to our podcast below:

As with any other financial decisions, you don’t need to make these decisions on your own. Contact a professional today to help walk you through what you need to know about long term disability insurance!