What is long-term disability insurance and how does it work?
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BLUEPRINT
Updated 11:58 a.m. UTC Nov. 9, 2023
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Key points
- Long-term disability insurance pays a portion of your income if you’re unable to work due to illness or injury.
- Coverage can last anywhere from five years up to retirement.
- You can get long-term disability through your employer or a private plan.
Long-term disability insurance is a type of disability insurance. Unlike short-term disability insurance — which is designed to cover temporary illness and injuries — long-term disability can cover a portion of your income for multiple years all the way up to retirement, depending on your needs and policy.
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What is long-term disability insurance?
Long-term disability insurance covers a portion of your income if you are too injured or ill to work for an extended period of time. Your benefits will typically last anywhere from five, 10 or 20 years or up until retirement age.
The benefit amount could be anywhere from 60% to 80% of your monthly salary. Experts recommend a coverage amount of at least 60% of your post-tax income to ensure you are able to cover your everyday expenses and other bills.
The typical elimination or waiting period for long-term disability insurance is anywhere from 90 days to a year, depending on the insurer.
If you are young and healthy, it might sound improbable that you’ll need disability insurance, but according to The Council of Disability Awareness, 1 in 4 people will experience a disability while they are still in the workforce. Having enough long-term disability insurance can be the difference between paying for child care, groceries and the mortgage or struggling to make ends meet.
What is covered with long-term disability insurance
In order to qualify for long-term disability benefits, you have to file a claim detailing your illness or injury and wait for approval from the insurance company. The most common conditions that are covered by long-term disability insurance (in descending order) include:
- Musculoskeletal disorders.
- Cancer.
- Muscle and ligament strains, fractures and sprains.
- Mental health issues.
- Heart attack, stroke and other circulatory diseases.
What isn’t covered by long-term disability insurance
Long-term disability insurance doesn’t cover all injuries or illnesses. For example, pre-existing diseases are usually excluded. Some of the common exclusions and coverage limitations include:
- Pre-existing conditions (if it starts within the first year of your effective date you would not qualify for coverage).
- Crime-related injuries if the disabled person is convicted.
- Disability that occurs during incarceration.
- Revoked professional certification or license.
- Self-inflicted injuries (not accidental).
- Taking active part in a riot.
- War or act of war.
- Workplace injuries (though some exceptions could be made if they are not covered by workers’ compensation).
How do you qualify for long-term disability insurance?
In order to get a long-term disability claim accepted, you’ll need to have a qualifying illness or injury. Your eligibility for long-term disability insurance will come down to the plan specifics. Each insurer has its own way of defining a disability. Two of the most important terms to look out for include:
- Own-occupation disability: This type of policy means you will receive benefits if you can no longer do your job but are able to work elsewhere. Within the own-occupation disability category, there are two subtypes:
- Transitional own-occupation, which means you get a benefit amount equal to your total disability amount minus the income you receive from your next role.
- Modified own-occupation, which means you get paid if you can’t work in your field of expertise and you’re not employed anywhere else.
- Any-occupation disability: Under this definition, you only qualify for coverage if you cannot maintain a job at all, roles that fall both under and outside your area of expertise. This is considered the strictest yet most affordable type of disability coverage because of how limited the coverage approval is.
How long-term disability insurance works
Long-term disability insurance replaces a portion of your income (coverage that accounts for at least 60% of your income is typically advised) for a set period of time while you are unable to work due to a qualifying illness or injury.
When you purchase coverage, you select the waiting period and benefit period, which will determine how quickly you can receive benefits after you are disabled and the period of time for which you receive those benefits. Benefit periods can generally be as short as five years and as long as your retirement age.
When you file a claim for long-term disability benefits, you’ll usually follow these steps:
- See your doctor to get the appropriate paperwork filled out detailing the nature of your disability.
- File a claim and wait for the insurer to review your case to determine if your disability is covered.
- If covered, you will receive benefit payments after the waiting period is over, up until the end of your coverage period.
How much does long-term disability insurance cost?
Long-term disability insurance is typically equivalent to 1% to 3% of your annual income, but several key factors play a role in setting the final price. If you have a group plan through your employer, it will almost always be cheaper than coverage purchased privately.
The following factors may impact the cost of long-term disability insurance:
- Benefit or coverage amount (percentage of your income that’s covered).
- Benefit period (usually 5 years up to retirement age).
- Waiting or elimination period (how quickly you’ll become eligible after a claim).
- Your age.
- Your gender.
- Your health and lifestyle.
- Your occupation.
If you work a high-risk job you may pay more. According to the U.S. Bureau of Labor Statistics, logging workers, fishing and hunting workers and roofers rank highest in terms of jobs with the highest risk of fatal injuries, so applying for disability insurance while working in those fields could potentially mean paying more for coverage.
Do you need long-term disability insurance?
Whether or not you need long-term disability insurance depends on your own financial situation, but keep in mind that there is a 25% probability of becoming disabled between the age of 20 and retirement, according to the Social Security Administration.
Injuries and unforeseen illnesses can happen at any time, so it’s important to be prepared. Given how difficult it is to qualify for Social Security disability benefits, it would be worthwhile to find out if your employer offers long-term disability coverage and if so, how much.
Depending on your needs, buying an individual long-term disability insurance policy could be prudent, especially if you don’t have significant savings or other means of covering your everyday expenses. A long-term disability could mean being out of work for decades, so having a financial safety net is crucial.
Findings from LIMRA: LIMRA’s Insurance Barometer Study revealed that these are the main reasons consumers purchase disability insurance:
- Planning retirement.
- Knowing someone negatively affected because they did not have a policy.
- Entering the workforce.
- Getting married.
- Having a child.
- Starting a business.
Where to get long-term disability insurance
You may be able to get long-term disability insurance through your employer as part of your benefits package. How much is covered and the cost depends on your employer. If it’s not free of charge, you might still be able to get a policy at a discounted rate through your employer, depending on how its plan is structured.
If your employer does not offer coverage, you are self-employed or you need additional coverage, you can buy an individual long-term disability insurance policy through a broker or agent.
Reviewing your coverage needs is important so that you can determine the benefit amount that makes sense for you. Always inquire about the benefit period and waiting period, which will impact how long you’ll be covered and how long you’ll have to wait before that coverage kicks in.
Short-term vs. long-term disability insurance
Short-term and long-term disability insurance both replace a portion of your paycheck when you’re unable to work, but there are several key differences, including the duration of coverage.
Short-term disability insurance is also known as “temporary disability insurance” because it’s only meant to cover you for a matter of months. Long-term disability insurance can last for years and even up until retirement, in some cases.
Rather than picking one type of insurance over another, you can benefit from them both. Some experts recommend starting with a short-term disability insurance policy that will cover you during the elimination period of your long-term disability insurance policy. Having the two policies working in tandem will ensure you avoid any coverage gaps and are able to cover your everyday expenses.
Here is a breakdown of how the two types of coverage stack up:
| SHORT-TERM DISABILITY INSURANCE | LONG-TERM DISABILITY INSURANCE | |
|---|---|---|
Definition
| A type of insurance that is often offered through your employer. It provides partial income replacement for a temporary amount of time.
| A type of insurance that provides partial income replacement for an extended amount of time.
|
Waiting period
| Typically two weeks, but it can be anywhere from one week to one month.
| Can be anywhere from 90 days to a year.
|
Benefit period
| Often three to six months, sometimes up to one year.
| Often five years, 10 years or up until retirement.
|
Coverage amount
| Usually about 60% of your salary.
| Usually 60% of your salary. Depending on the insurer, it may be no more than $7,500 per month.
|
Frequently asked questions (FAQs)
If you or your loved ones depend on your income to cover everyday expenses and maintain your quality of life, long-term disability insurance (through your employer, purchased privately or both) can provide financial peace of mind and may be worth it depending on your financial situation. Other types of coverage to consider include life insurance and accidental death and dismemberment (AD&D) coverage.
Long term-disability insurance helps you pay for recurring expenses like bills, mortgage payments, child care and groceries while you are out of work and unable to provide a household income.
The most common long-term disability claims involve musculoskeletal disorders, which include conditions such as arthritis, osteoporosis and gout, according to The Council for Disability Awareness.
Keep in mind that disability insurance plans vary, and not all conditions will qualify for coverage. Always take note of plan coverage and exclusions before you purchase your policy
If you are self-employed or your employer does not offer long-term disability insurance, you can buy an individual long-term disability insurance plan, much like you can purchase a life insurance, car insurance or homeowners insurance plan. You can also purchase coverage to enhance the plan that is offered through work.
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