One in five American workers will become disabled for an average of 2.5 years. Learn how to protect your income with long-term disability insurance should you find yourself in this situation.
You’ve got health insurance, prescription insurance, dental insurance, homeowners insurance, auto insurance, life insurance and maybe even long-term care insurance. So you’re completely covered, right? Wrong. Disability insurance is the most overlooked type of insurance available, but it just as important as the other insurance policies you’re carrying.
Why do you need long-term disability insurance?
Long-term disability insurance is often called “the forgotten risk” or, even more frightening, “the living death.” That’s because, according to the U.S. Census Bureau, one in five American workers will become disabled. The typical length of absence from work due to long-term disability is 2.5 years, according to the Council for Disability Awareness. And one out of every seven workers will be disabled for five years or longer, according to the National Association of Insurance Commissioners.
How will you survive during this time without a steady income? Long-term disability insurance can help you get through by replacing a portion of your income. You may have short-term disability insurance now through your employer, which typically replaces up to 60 percent of your income for anywhere from a few months to up to two years. But what happens after that?
Long-term disability insurance, which you purchase on your own, kicks in after your short-term disability insurance ends. Considering the average length of disability is over two years, this could be extremely beneficial to you in preserving your finances while you are unable to work. Long-term disability plans will typically cover up to 70 percent to 80 percent of your income. (No plan will fully replace your income for fear that you will not return to work.)
What will a long-term disability insurance policy cost?
As with all things insurance-related, the answer to this question is “it varies.” Prices vary widely based on your age, gender, health status, occupation and the type of policy you purchase. Here are some things to take into consideration when shopping for long-term disability:
- The amount of coverage. Determine what percentage of your income you could afford to live on should you become disabled. The less coverage your policy provides, the less expensive it will be; however, you don’t want to pay for a policy that will be virtually worthless should you become disabled.
- The waiting period. The waiting period is the amount of time from when you become disabled to when your long-term disability benefits kick in. Check with the short-term disability plan you have through your employer to see how long your benefits last. Then determine if you need your long-term disability benefits to kick in right after your short-term benefits end, or if you can wait a little longer. The longer your waiting period, the lower your premiums.
- The definition of disability in your policy. Disability can be defined in two ways: as “own occupation” or as “any occupation.” Any occupation means you are disabled from performing any job that
you are qualified to do. Own occupation means you are disabled from performing your specific occupation. This definition provides you with the greatest coverage./
- The benefit period. Determine how long you want to receive long-term benefits once they kick in. As long as you remain disabled, you can potentially continue to receive your benefits until the end of your life, although typically benefits will last from two to five years, or, if you choose, until age 65 when Social Security benefits will likely kick in.
- The type of policy. Policies that are non-cancellable can never be cancelled by the insurer. And those that are guaranteed renewable can continue to be renewed by you at the same price year after year as long as you pay your premiums on time.
- Whether you need supplemental coverage. You can purchase additional coverage to your policy, known as riders. Having a non-cancellable and guaranteed renewable policy often require purchasing riders. As does a cost-of-living adjustment, the ability to increase coverage later on, and the ability to receive payment if you are only able to return to work on a part-time basis.
- Waiver of premium. Check to make sure your policy includes a provision that waives your premium cost if you are disabled for 90 days or longer.
So what type of long-term disability policy should you buy?
The answer to this question is, again, it varies. You’ll need to juggle what coverage you are most comfortable with along with what you can afford. Talk with an insurance broker or financial planner to find the policy that is best for you. In general, you will want:
- the highest monthly benefits for which you can qualify.
- “own occupation” coverage for life if you can get it. (Many insurers now only offer the “any occupation” coverage.)
- the longest waiting period you can afford.
- to include a “cost of living adjustment rider.”
- to include a rider that pays if you can return to work only part-time.
- a non-cancellable and guaranteed renewal policy.
How do I purchase a long-term disability insurance policy?
Through a financial advisor or insurance broker. You can find brokers through the Independent Insurance Agents & Brokers of America. Before signing on for a policy, check the financial soundness of the company by reviewing A.M. Best ratings .
Be prepared for a lengthy health check, which may even require an exam, when applying for long-term disability insurance. Certain medical or psychiatric issues could cause your policy to be denied or to have riders attached exempting those issues from coverage. This may or may not affect you, but in any event be prepared for an in-depth screening of your medical history.
For additional information, a guide to buying long-term disability insurance is available through the American Council of Life Insurers .
This article contains general information. Individual financial situations are unique; please, consult your financial advisor or insurance broker before utilizing any of the information contained in this article.
Source: SmartMoney.com, MSN Money, NY Times, Insure.com