We insure our homes, cars, and even our vacations but often overlook guaranteeing what could be our most valuable asset: our ability to earn an income. Long-term disability insurance (LTD) is a critical yet underappreciated component of a comprehensive financial plan. This type of insurance provides financial protection if you cannot work for an extended period due to illness or injury. Here's why considering long-term disability insurance is a smart move for safeguarding your future.
Statistics suggest that during one's career, the probability of encountering a disabling illness or injury is surprisingly high. According to the Council for Disability Awareness, one in four of today's 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach the average retirement age. Despite this, long-term disability insurance remains a blind spot in many people's financial plans.
Long-term disability insurance is designed to kick in after short-term disability policies, usually after a waiting period of three to six months. It can provide coverage for several years or until retirement age, depending on the policy. The benefits typically range from 50 to 70 percent of your pre-disability income. This income can be vital in maintaining your standard of living, allowing you to cover living expenses, medical bills, and other costs while you're unable to work.
When assessing whether LTD insurance is right for you, consider your current savings and investment levels. Could they sustain you and your family if your income were to stop suddenly? If the answer is no, LTD insurance may be an essential safeguard. Furthermore, if you work in a profession with a high risk of injury or have a medical history that could lead to future disabilities, LTD insurance becomes even more crucial.
Many employees can access LTD coverage through their workplace benefits package, but this coverage can be limited. Employer-sponsored LTD policies often have restrictions contingent upon your employment with the company. If you change jobs, you may lose your coverage. In contrast, an individual LTD policy is portable and customizable. With a separate policy, you can choose the benefit period, waiting period, and coverage features that best suit your needs.
The cost of LTD insurance varies based on several factors, including age, health, occupation, and the level of coverage chosen. Generally, the younger and healthier you are, the lower your premiums will be. It's also important to note that if you pay your premiums with after-tax dollars, any benefits received will typically be tax-free.
When shopping for LTD insurance, it's essential to understand certain policy features:
Non-cancelable: This guarantees that the insurer cannot cancel your policy if you pay the premiums.
Guaranteed renewable: This ensures that you can renew your policy with the same benefits and only cancel the policy if you fail to pay dividends.
Own-occupation vs. Any-occupation: "Own-occupation" policies provide benefits if you're you're unable to perform your specific job, while "any-occupation" policies only pay out if you're you're unable to perform any job for which you're you're qualified.
Benefit period: This defines how long you will receive benefits. Some policies pay until age 65, while others have a limited term of 2, 5, or 10 years.
Waiting (elimination) period: This is the time between the onset of disability and when benefits start. Shorter waiting periods result in higher premiums.
It's important to note that if you qualify for Social Security Disability Insurance (SSDI), your LTD benefits may be reduced. Most LTD policies are designed to work with SSDI, supplementing the benefits to ensure you receive a certain income level.
Long-term disability insurance is not just a policy—it's a strategic financial tool that can mean the difference between a secure future and a challenging one in the face of adversity. It's an investment in maintaining your lifestyle and protecting your family's well-being, should the unexpected happen. While no one likes to imagine becoming disabled, planning for the possibility is a responsible and proactive step.
Before deciding on a policy, it's advisable to consult with a financial advisor or insurance specialist who can help you navigate the complexities of LTD insurance and find an approach that aligns with your personal and financial circumstances.
By incorporating long-term disability insurance into your financial plan, you are not just preparing for potential challenges; you are ensuring peace of mind. Remember, your ability to earn an income is the foundation upon which all your other plans are built—protecting it isn't just optional; it's essential.