Most professionals spend time planning for the future. The issue is, not everyone considers what they would do if they were suddenly unable to work. Having your income disappear due to a disability could be earth-shattering. As a result, many begin to explore their long-term disability (LTD) insurance options. But figuring out whether LTD insurance is a good buy can be challenging. If you want to see whether securing a policy is a smart move. Here’s what you need to know.
What Is Long-Term Disability Insurance?
LTD insurance is a financial product designed to provide you with a source of income if you aren’t able to work for an extended period. At times, it’s referred to as income replacement insurance. As it’s meant to provide you with a consistent amount every month. Just like a paycheck from a job.
How Does Long-Term Disability Insurance Work?
While the concept behind LTD insurance is incredibly straightforward, how it works is a bit complex. The simple part is the benefit amount. Your policy will state how much you are eligible to receive on a monthly basis. While the exact amount can vary. It’s generally no more than 60 percent of your pre-tax monthly pay.
Next, you have to contend with the elimination period. Elimination periods are a specific number of weeks or months. You have to be disabled for that amount of time before your LTD insurance benefits start. Before that occurs, you’ll have to rely on other sources of income. Such as personal savings, workers’ compensation benefits, or short-term disability insurance.
Typically, an elimination period is between three and six months. However, some policies could have longer ones.
Additionally, every LTD policy has a benefit period. This marks how long you can receive benefits before you’ve exhausted your policy. Some last only a few years. While others will provide a source of income until you reach retirement age, even if that is decades away.
Finally, LTD insurance can have exclusions. Those are specific conditions or situations where you aren’t eligible to receive benefits from the policy even if you become disabled. Typically, exclusions include pre-existing conditions or those that occur because of your participation in an activity deemed dangerous.
Beyond that, as long as your situation qualifies for the benefit, you’ll receive the designated amount either until you are no longer disabled or reach the end of your benefit period.
The Cost of Long-Term Disability Insurance
How much your LTD policy costs depends on a variety of factors. First, your age, gender, health history, occupation, and location play a role. Additionally, the elimination period, benefit period, benefit amount, and other policy features alter the price tag.
In most cases, however, LTD insurance will cost you between 1 and 3 percent of your annual income. You may be able to cover that amount in monthly payments or by sending a lump sum to cover the full cost for a given year.
How Much Disability Insurance You May Need
Determining how much you may need with an LTD policy requires you to examine your current and projected expenses. Usually, you’ll want to review your budget and other financial goals. Additionally, you may need to factor in potential medical costs that can come with a long-term disability.
You may or may not want to factor in other sources of income. For example, while it’s true that you may also qualify for Social Security disability payments. It’s important to understand that these can be quite low.
How much you’ll receive depends on the amount you’ve contributed to Social Security during your career, your monthly income level, and how many credits you’ve earned. That determines whether you can qualify for any benefits. If you’re only eligible for Social Security Disability Insurance (SSDI), or if may receive Supplemental Security Income (SSI) payments as well. You can learn a bit about how much you might receive by heading to the mySocialSecurity portal.
It’s also important to consider that a qualifying disability in the eyes of the Social Security department may differ from what’s listed in your LTD policy. As a result, you may be eligible to use your policy without qualifying for Social Security benefits.
Disability At Least 12 Months
Further, Social Security requires that you experience the disability for at least 12 months before you apply. You also won’t receive a decision for around three to five months. This creates a potential total delay of at least 15 months after you end up disabled. As a result, you may or may not want to factor Social Security disability benefits into the equation.
After reviewing your budget, you can also assess what you have in savings or investments that you could tap for income. If you have a lot of savings. Your LTD policy needs may be less or even non-existent. However, if your savings is limited. Then you may need a larger policy.
Your goal should be to secure a substantial enough LTD policy to cover your expenses, either totally or with help from another household member’s income. That way, you won’t experience undue financial hardship.
Is Long-Term Disability Insurance a Good Buy?
Whether LTD insurance is a good buy depends on your unique situation. If you have little in savings and rely heavily on your personal income, an LTD policy could provide you with some critical protection. You are essentially guaranteeing yourself a source of income should you become disabled long-term.
However, if you have a lot stashed away in savings and investment accounts or live in a household that doesn’t rely heavily on your income, LTD insurance may be unnecessary. Examine your situation closely. That way, you can make a decision that’s right for you.
Do you think long-term disability insurance is a good buy? Why or why not? Share your thoughts in the comments below.
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