Long Term Disability Insurance for Income Replacement Explained

long term disability insurance

Long-term disability insurance offers the most comprehensive income replacement coverage

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  • Disability insurance replaces lost income if you cannot work because of an injury or chronic illness.
  • Most employers offer short-term disability insurance, but it’s probably not enough.
  • Long-term disability insurance takes over where short-term coverage and your emergency fund end.
  • Check out the insider’s guide to the best disability insurance companies.

If you rely on a regular salary to support yourself or your family, it would be wise to protect that income with disability insurance.

Disability insurance is like insurance for your salary if you are unable to work. Disability insurance can replace your income if you have a physical or mental handicap and cannot work for a few months to several years.

After work-induced musculoskeletal disorders (think: carpal tunnel, tendonitis and back pain), the the most common disability insurance claims are for cancer, pregnancy and mental health issues like


depression

and anxiety.

Most traditional employers offer short term disability insurance (STD), but this usually only replaces up to 50% of your income for about three months, plus you’ll have to pay taxes on the payments. In addition, these policies depend on your employment with the company. Most people need long term disability (LTD) coverage.

What is long term disability insurance?

Although the Social security administration offers disability insurance, the process of qualifying as disabled and obtaining approval for benefits is notoriously long and difficult. Plus, the payouts are low compared to what you might get with a private policy.

In 2018, only 34% of workers had access to a long-term disability plan through their employer, according to data from the Bureau of Labor Statistics.

That’s why experts recommend purchasing long-term disability insurance for the most “comprehensive and cost effective” coverage. Long-term disability insurance can effectively pick up where short-term coverage or your emergency fund left off, typically between 90 days and a year after the incident (called the elimination or waiting period).

Long term disability insurance pays for a portion of your lost income from one year to the rest of your life, depending on your policy. Individual long-term disability insurance includes two types of policies that determine your coverage: all occupancy and personal occupancy.

Long term disability insurance any occupation vs personal occupation

There are two types of individual long term disability policies: all-occupation and own-occupation. It’s important to understand the difference between the two, as certified financial planner Martin A. Scott wrote in an article for Insider, as this will determine if you’re covered if you become disabled.

He wrote:

All-occupation policies cover an insured who is unable to work in a job that matches the person’s education and experience.

Own occupation Policies provide coverage when a person cannot take on the responsibilities of their specific profession, even though they still have the capacity to work in another profession.

Scott noted that self-occupancy policies protect income better, but they are also more expensive.

Scott used the following example of Barbara, a surgeon, who is in a car accident which hurts her hand. She can no longer work as a surgeon, but she could still work as a different kind of doctor. If Barbara had an “all occupation” policy, she would not receive disability benefits after her accident because “despite her injury she has the opportunity to find medical employment,” Scott wrote.

However, if Barbara had a “own occupation” policy, she would be “entitled to receive disability insurance benefits until her hand heals completely and she can return to work in surgery,” Scott wrote. He noted that a self-occupancy policy is extremely flexible; the benefits would continue even if Barbara decided to work in a completely different field for a period of time.

Short-term or long-term disability insurance

You’ve probably heard of Short Term Disability (STI) through your employer. Short-term disability insurance covers loss of income for about three months due to illness, injury or pregnancy and recovery after childbirth. California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico require employers to provide some form of short-term disability.

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The cost of long term disability insurance

The cost of disability insurance depends on several factors, such as your benefit amount, benefit period, occupation, state of health, age and policy conditions (whether it is any profession or his own profession).

The general rule of thumb is that the cost of an individual long term disability policy is 1% to 3% of your annual salary, depending on the nonprofit life insurance organization. Life goes on. Therefore, the costs vary greatly from person to person. You can also pay a supplement for specific policies, such as “own occupation,” which states that you will continue to receive full benefits even if you are able to work, even another job.

With long term disability insurance, you are responsible for choosing your coverage or the amount of your benefits. The rule of thumb is around 60% of your gross pay. Other factors include: (1) the benefit period, that is, the length of your payments; and (2) the waiting or waiting period, which is the time you have to wait until your insurance payments go into effect.

It is important to note that some long term disability insurance policies have exclusions for pre-existing health conditions. Insurers will review your medical records and if you have had serious treatment for a previous illness or condition, it may be excluded from your coverage. In other words, if this specific condition prevents you from going to work and earning an income in the future, your insurance will not intervene.

Life Happens, a non-profit life insurance education agency, offers a free disability insurance calculator. To give you an idea of ​​the costs, we’ve found the following estimates based on a hypothetical 35-year-old teacher living in Michigan, earning $ 50,000 per year, with a 90-day waiting period.

About Antoine L. Cassell

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