Long-term disability insurance gets little attention, but can pay off big

“It won’t happen to me.” This sentiment may explain consumers’ attitude towards long-term disability insurance, which pays part of your income if you are unable to work.

Sixty-five percent of respondents surveyed this year by LIMRA, an association of financial services and insurance companies, said most people need disability insurance. But the figure dropped to 48% when people were asked if they thought they personally needed it. The proportion narrowed to 20% when people were asked if they actually had disability insurance.

As the annual benefits enrollment season begins at many companies, disability coverage may be an option worth considering.

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Some employers may ask you to pay a larger share or even the full cost. This may have a hidden benefit later on if you use politics. Or you may find that your employer has automatically signed you up – or plans to do so – unless you opt out. A growing number of employers are going this route to increase coverage that they believe is in the best interests of their employees, let alone their own, since insurers typically require a minimum level of employee participation in order to offer a plan.

Benefits consultants agree that while long-term disability coverage doesn’t have the novelty appeal of some other benefits offered by companies these days – hello, pet insurance – it can be much more valuable in the long run.

“This is a really critical safety net benefit,” said Rich Fuerstenberg, senior partner at human resources consultant Mercer.

If you become disabled due to an accident, injury or illness, long-term disability insurance typically pays 50-60% of your income while you are unable to work. The length of time the policy pays varies; some policies pay up to the age of 65.

Long-term disability usually has a waiting period of three or six months before benefits come into effect. This period would be covered by short-term disability insurance, if you have it.

Many long-term disability claims relate to chronic conditions such as cancer and musculoskeletal disorders. According to the Disability Awareness Council, the Average duration of a claim is nearly three years — 34.6 months.

Not everyone has savings to support them during this time. When the Federal Reserve Board surveyed adults about household economics in 2015, 53% said they had no rainy day fund that could cover them for even three months. More troubling, nearly half of respondents — 46 percent – said that when faced with a hypothetical emergency expense of $400, they didn’t have the money to cover it.

According to the Social Security Administration, 1 in 4 people who are 20 now will be disabled before reaching the age of 67.

Overall, 41% of employers offer long-term disability insurance, according to LIMRA, although the proportion of larger employers that offer it is generally much higher. Compared to health insurance, premiums cost a pittance — $256 a year in 2016 on average for group plans, LIMRA says. Many employers pay the full bill or charge workers a small amount.

However, as employers continue to shift benefit costs onto the shoulders of employees, long-term disability is no exception. Increasingly, they are offering coverage as a “voluntary” benefit, meaning employees pay the full premium.

The benefit is that if employees pay for the coverage themselves with after-tax dollars and they become disabled and need to use the coverage, the benefits will be tax-free.

“If an employee can choose to pay for after-tax coverage, or if they pay on a voluntary basis, that’s better for them,” said Jackie Reinberg, national practice leader for absences, management of the Disability and Life at Willis Towers Benefits Consultant. Watson.

Some employers may pay a basic basic benefit that replaces 40 or 50% of income and offer workers the option of “buying out” a more generous income replacement of 60 or 70%.

Although voluntary coverage has a tax advantage, disability consultants are concerned that leaving responsibility to employees, especially if they choose from several other voluntary coverage options like cancer insurance, critical illness insurance and yes , pet insurance, increases the chances that they avoid buying long-term disability coverage.

“These blankets all look the same, and if you’re going to pick one, you tend to pick the one that’s the cheapest and the one that you think you can use,” said Carol Harnett, president of the Council for Disability Awareness. , a group of disability insurer members that provides education and awareness on disability issues.

Automatic registration can make a big difference. Employers who automatically enroll their employees in voluntary long-term disability plans can enroll 75% of employees, compared to 30% for employers who leave workers entirely in their care, said Mike Simonds, CEO of the insurer Unum US disability.

If you were offered long-term disability coverage when you were hired and didn’t enroll, it may be more difficult to do so during the open enrollment period, Fuerstenberg said. A growing number of health insurance plans require employees to show “evidence of insurability,” which means they must answer a series of health-related questions before being approved. Some long-term disability policies may also have pre-existing condition provisions that will not pay benefits for a condition for up to one year, for example.

Please visit khn.org/columnists to submit comments or ideas for future topics for the Insuring Your Health column.

About Antoine L. Cassell

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