Updated: Mar 14, 2024

Long Term Disability Insurance: How Does It Work?

Learn how long term disability insurance cover workers who may not be able to bring in income after a serious injury and when a private policy makes sense.
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If you become disabled, it impacts your life in many ways.

Disability can make simple tasks around the house much harder or take much longer to complete.

Even worse:

Disability may prevent you from handling your duties at your job.

This could result in a loss of income if you can’t work and don’t have vacation or sick leave to cover the time off you need to recover.

That’s where disability insurance steps in.

There are two major types of disability insurance.

Short-term disability insurance generally covers disabilities that last anywhere from 30 days up to a year, depending on your policy.

In many cases, a fully stocked emergency fund could cover you for a period of time.

What an emergency fund can’t protect you from are longer-term disabilities.

That’s why long-term disability insurance may have a place in your financial plan.

What is Long Term Disability Insurance?

Long term disability insurance typically kicks in when short term disability insurance stops.

It pays you regular payments if you become disabled according to the policy’s definitions.

The payments for disability insurance don’t fully replace your income, though.

How much and for how long?

Most policies only pay around 50% to 60% of your job-related income.

Each policy has different time periods within it, but it generally starts paying out after an elimination period of 90 days or 180 days.

During the waiting period, you don’t get any money. For this reason, many people have a short term disability insurance policy, too.

Others may self-insure by saving up a six-month emergency fund.

Why Do You Need Long Term Disability Insurance?

No one hopes to become disabled, but it happens much more often than you’d think.

Around one in four 20-year-olds will be affected by a long term disability at some point in their life.

During that disability, it may be difficult or impossible to work. If you cannot fulfill your job duties, your job generally won’t pay you.

Instead, you’ll need an alternative source of income as a safety net. That income can come from a long term disability policy.

How Does It Work?

Once you become disabled, you need to start collecting documentation.

Read your policy to see exactly what you need to file a claim correctly.

Medical documentation

In general, this includes statements about your work and reports from medical professionals saying why your disability precludes you from working.

It’s essential to have detailed documentation saying why you cannot work.

Otherwise, you’ll get denied.

Deadlines & exceptions

There may be deadlines you must meet to qualify for benefits, so understanding your policy is essential.

These policies won’t cover everything. They may not pay out if you have a pre-existing condition or get injured in high-risk activities, such as sky diving.

Elimination period

Once the insurance company has all of your information, you don’t get paid until your elimination period passes.

After the elimination period ends, you start receiving monthly benefit payments while you’re disabled.

Limits apply

Your policy may limit how long it pays out to a certain number of years.

Other policies may pay out until you reach the traditional retirement age if you remain disabled.

During this time, you work to recover.

Medical updates

The insurance company will likely want medical updates showing your progress.

This will also help them verify if you’re still disabled.

When you’re cleared to return to work, the payments generally stop.

Specific riders may provide additional benefits if you can partially return to work in a diminished capacity, though.

What Counts as a Disability?

Your policy will define precisely what is considered a long term disability.

That said:

Common disabilities include cancer, chronic pain, severe illness or injury.

These disabilities must prohibit you from working for the long term according to your policy.

Different types of disability

Different types of long term disability policies exist.

Some pay out if you cannot perform your specific job. Others only pay out if you cannot work any job and essentially have a total disability.

This difference is key to whether you may receive benefits.

If you work in a factory, a disability may prevent you from performing your specific job.

However, a policy that only pays out if you cannot complete any job would not pay out if you could still work in a call center.

Working in a call center would likely pay less than working in a factory, but the disability insurance policy still wouldn’t cover you.

That’s why it may be important to get job-specific disability insurance that covers you if you cannot work in your specific job.

Coverage Options to Consider

When you’re considering long term disability insurance policies, there are several different areas you should examine carefully.

Payout percentage

Long term disability policies won’t pay you your full salary. Instead, they pay a percentage.

Most policies tend to pay around 50% to 60% of your salary. You could purchase higher or lower amounts based on your needs if the policies are available.

The downside is the cost. The higher the salary replacement percentage is, the higher your premiums will be.

Elimination period

Elimination periods can vary from policy to policy.

You have to wait until the period is over before you start receiving a monthly benefit amount.

Shorter elimination periods generally result in higher premiums.

Disability qualifications

It’s imperative to know what qualifies as a disability under your policy.

Does it require you to be disabled from not completing your job or any job?

The job-specific policies will likely be more expensive.

How long benefits last

Some policies will make payments until you reach the traditional retirement age.

Others cap your payments to a certain number of years. The longer the potential payout period is, the higher the cost will likely be.

Cost of living increases

Does the policy increase your payouts based on a cost of living factor? If so, what does it use?

The better this feature is, the more your policy will cost.

Renewability, rate locks, other riders

Disability policies may have several features you can pay to add.

You may want guaranteed renewability, a rate lock that prevents your policy’s price from increasing, or other riders the insurance company offers.

Consider all riders carefully as they add to the cost of your premiums.

How Much Does Long Term Disability Insurance Cost?

Your long term disability insurance policy’s cost depends on several factors. This includes your age, health, job, where you live, and other personal characteristics.

The coverage options you choose also impact your rates.

That said, expect to pay about 1% to 3% of your salary in premiums for your policy.

Where Can You Purchase a Policy?

Some employers offer long term disability insurance as an employee benefit.

If you’re looking for a new job, the policy’s details may be included in your employment offer.

Current employees can usually opt in for coverage during the annual benefits open enrollment period.

You may have to pay to get coverage, but some companies cover the full cost. If you have to pay, your employer may subsidize some of the cost.

The downside to this coverage is it is tied to your job.

If you decide to leave your job after developing a disability, you may not be able to continue keeping your long term disability policy.

You can buy an individual long term disability insurance privately, as well.

This will likely be more expensive as it is not a group plan and is not subsidized by your employer.

Even so, this allows you to shop around for the best policy for your needs.

Who Needs Long Term Disability Insurance?

Very few people could survive financially if they become disabled for the long term.

Social Security Disability Insurance (SSDI) administered by the Social Security Administration may provide a minimal amount of coverage. It may not provide the income you’re used to.

It may also take a long time to get approved when you need income immediately.

If you cannot afford to go without your income for more than six (6) months, chances are you should consider a long term disability insurance policy.

Shop Around for the Best Policy

Long term disability coverage can be confusing and expensive. For this reason, it’s often best to shop around.

This allows you to compare multiple policies and premiums. You can then see what the differences are to help you make an informed decision.

If you need help getting quotes and deciphering benefits, you may want to consider using an insurance broker.

An insurance broker should understand long term disability insurance policies. They should also be able to get you quotes from several providers.

The insurance broker will earn a commission for selling you a policy. Even so, their advice could help you pick an ideal policy for you.

Be sure to verify anything they state actually exists in the policy to understand exactly what you’re buying.