What is Long-Term Disability Insurance and How Does It Work?

What is Long-Term Disability Insurance and How Does It Work?

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long term disability insurance policy

Long-term disability insurance provides income replacement if you become disabled and unable to work for an extended period. It can help pay for living expenses like mortgage/rent, groceries, utilities and more.

Long-term disability insurance is an important financial safety net for many workers. Studies show that 1 in 4 of today's 20-year-olds will become disabled before they retire. Most disabilities are caused by illnesses like cancer, heart disease and diabetes - not accidents.

This comprehensive guide explains what long-term disability insurance is, how it works, who needs coverage and how to get the best policy for your needs and budget.

What is Long-Term Disability Insurance?

Long-term disability insurance (LTD) provides partial income replacement if injury or illness prevents you from working. It kicks in after you have been disabled for a set waiting period, which is typically 90 or 180 days. The coverage then replaces a portion of your income, usually around 60%, for a set benefit period.

LTD policies pay monthly benefits until:

  • You recover and can return to work
  • You reach the maximum benefit period in your policy (typically 2 years, 5 years or to age 65)
  • You reach the policy's maximum payout limit
  • You begin receiving Social Security retirement or disability benefits
  • You die

The money can help pay important living expenses like mortgage/rent, groceries, utilities and out-of-pocket medical costs. It helps maintain your standard of living until you can work again.

LTD differs from short-term disability insurance, which covers temporary disabilities lasting weeks or months. And it differs from workers' compensation insurance, which covers disabilities occurring due to workplace accidents.

How Does Long-Term Disability Insurance Work?

Long-term disability insurance has several key features that determine how policies pay benefits.

Definition of Disability

Insurance companies use an "own occupation" or "any occupation" definition of disability.

  • Own occupation policies pay if you cannot perform the material duties of your regular job due to injury or illness.
  • Any occupation policies pay if you cannot work any job for which you are reasonably qualified based on training, education and experience.

Own occupation policies offer stronger protections. Engineers could still get benefits if an injury prevented them from working, but they could potentially do a desk job.

Benefit Waiting Periods

The waiting period is the time between becoming disabled and starting to receive benefits. Typical waiting periods are 90, 180 or 365 days. Shorter waiting periods cost more.

Monthly Benefit Amount

Policies pay a percentage of your gross monthly earnings, often around 60%. Some pay benefits based on net income after taxes and deductions. The monthly amount is capped at a percentage of income, often around $5,000 or $10,000.

Benefit Period

The benefit period is how long benefits can be paid once you qualify for coverage. Common options are 2 years, 5 years, to age 65 or 67, and "to Social Security normal retirement age." Longer benefit periods cost more.

Social Security Integration

Many LTD policies integrate with Social Security disability benefits. Your monthly LTD payout may be reduced by other income you receive. But your total benefits from all sources will equal the percentage promised in your policy.

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Who Needs Long-Term Disability Insurance?

Long-term disability insurance is important protection for any worker relying on their income. The need increases for:

  • Primary breadwinners - Loss of your income could devastate family finances.
  • Single earners - You don't have a second income to fall back on.
  • People without workplace coverage - Just over 1 in 3 workers have employer-provided LTD.
  • Professionals and white collar workers - Your paycheck depends on your ability to perform complex duties.
  • Middle-aged workers - Your disability risk rises as you age.
  • Self-employed workers - You must provide your own disability coverage.
  • Blue collar workers - Your occupation is physically demanding.
  • Individuals with chronic conditions - You may be uninsurable later if health declines.
  • People with high incomes - You need enough coverage to maintain your lifestyle.
  • Parents - Your family depends on your ability to work.
  • People with inadequate savings - Disability could bankrupt you without insurance.

How Much Long-Term Disability Insurance Do You Need?

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how much long term disability insurance do you need

As a rule of thumb, you need an LTD policy that will replace 60-80% of your pre-disability income. Several factors determine the right amount of coverage:

  • Your fixed monthly expenses - Rent/mortgage, car loans, utilities, groceries, medical costs.
  • Your lifestyle - Do you need extra for travel or hobby expenses?
  • Your emergency fund - More savings means you can get by with less coverage.
  • Your spouse's income - A working spouse provides a buffer.
  • Benefits from other sources - Some income may continue while disabled.
  • Social Security benefits - Average SSDI payment was $1,358 per month in 2021.
  • Future income needs - Will your living costs rise based on household changes?

Use online disability insurance calculators to estimate your ideal income replacement percentage and monthly benefit amount.

How Much Does Long-Term Disability Insurance Cost?

LTD insurance premiums depend on factors like:

  • Your age - Premiums rise as you get older.
  • Your gender - Premiums are a bit lower for women on average.
  • Your occupation - More hazardous jobs mean higher premiums.
  • Your health - Poor health drives up premium costs.
  • Policy provisions - Benefit period, waiting period, monthly payout, etc.

At age 30, LTD insurance could cost around $30 per month for a $2,500 monthly benefit. That climbs to around $60 per month at age 45. Older workers may pay over $100 per month depending on benefit amounts and other factors.

Using a financial advisor to evaluate your needs, shop policies, and optimize coverage can help you secure affordable long-term disability insurance protection.

Individual vs Group Long-Term Disability Insurance

You have two main options for purchasing LTD coverage - individual policies or group plans through your employer.

Individual LTD insurance offers advantages like:

  • Portability - You keep coverage if you change jobs.
  • Customization - Tailor the policy to your unique needs.
  • Own occupation - Gives you stronger disability protections.
  • Guaranteed renewable - Renewal cannot be denied due to poor health.

Group LTD plans offer advantages like:

  • Cost - Group rates are cheaper due to risk pooling.
  • Convenience - Premiums are automatically deducted from paychecks.
  • Limited medical underwriting - You may skip health screening if part of a large group.
  • Tax benefits - Your share of premiums are paid with pre-tax dollars.

For the best protection, consider an individual policy in addition to any group LTD benefits your employer offers.

Long-Term Disability Insurance Features

Policies have additional features and riders to customize your coverage. Key options include:

Cost of Living Adjustment (COLA) Rider

COLA riders increase your benefit amount annually to help keep pace with inflation. Typical increases are around 1-5% per year.

Future Increase Option (FIO)

An FIO rider lets you purchase additional coverage at set intervals without new medical underwriting. Helpful if your income rises.

Residual Disability Rider

Pays partial benefits if a disability reduces your earnings but doesn't eliminate your ability to work.

Catastrophic Disability Benefit

Provides an additional lump sum - often your full annual salary - if you cannot perform 2+ activities of daily living.

Automatic Increase Benefit

Automatically increases your monthly benefit amount by a set percentage each year - typically around 5%.

Waiver of Premium

Waives your premium payments while you are collecting disability benefits after the waiting period.

Long-Term Disability Insurance Exclusions & Limitations

Like all insurance, LTD policies have exclusions. You will not receive benefits for disabilities resulting from:

  • Pre-existing conditions - Injuries/illnesses you had prior to the policy taking effect.
  • Mental health issues - Conditions like anxiety, depression, bipolar.
  • Alcohol & drug abuse - Unless you are actively receiving treatment.
  • Self-inflicted injuries - For example, attempted suicide.
  • Unlawful acts - Disability stemming from a crime or prison time.
  • War - Disability caused by combat or military training.
  • Normal pregnancy - Some plans cover complications from pregnancy.

Benefits will also be denied if you are able to work but choose not to. And they will end as soon as you can perform any work that your occupation qualifies you for.

How To Get Long-Term Disability Insurance

You have several options for obtaining quality LTD coverage:

  • Check if your employer offers group LTD. Enroll and consider supplemental individual coverage.
  • Join professional associations or alumni groups that offer LTD insurance to members.
  • Work with an independent insurance agent experienced with disability products.
  • Get quotes online through insurer websites or insurance comparison platforms.

When evaluating policies:

  • Review definitions of disability carefully.
  • Make sure the benefit amount meets your needs.
  • Consider adding a cost of living adjustment (COLA) rider.
  • Look for exclusions for mental health treatment limits.
  • Check when benefits would end - choose "to age 65/67" if possible.

Frequently Asked Questions About Long-Term Disability Insurance

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1. Is long-term disability insurance taxable?

If you pay LTD premiums yourself with after-tax dollars, the benefit payments are tax-free. If your employer paid the premiums, benefits are taxable income.

2. Is LTD insurance worth it?

LTD provides invaluable income protection for workers who could not pay the bills if injured or ill. For most working adults, the cost is worth the peace of mind.

3. What medical conditions qualify for long term disability?

Common conditions leading to LTD claims include cancer, heart disease, stroke, diabetes, back/neck injuries, depression and musculoskeletal disorders. Your physician must confirm you cannot work.

4. Can you be denied long term disability insurance?

Yes, you can be denied LTD coverage based on your medical history, occupation and hazardous hobbies. Certain conditions like neuromuscular disorders are often uninsurable for LTD.

5. How long do you have to be out of work to collect long term disability?

LTD benefits begin after the waiting period in your policy, which typically ranges from 90 to 365 days of being disabled. You cannot return to work at all during the waiting period.

6. Can you get fired while on long term disability?

Yes, your employment can still be terminated while collecting LTD benefits. The insurance payments are considered income replacement, not wage continuation through your employer.

7. Can you get social security disability and long term disability?

Yes, if your LTD policy includes a Social Security integration clause, your benefits from the two will coordinate. Your LTD payout will be reduced by the amount of your SSDI award.

8. What conditions automatically qualify for disability?

The Social Security Administration has a list of medical conditions that automatically meet the disability approval criteria, including certain cancers, neurological disorders, HIV infection, multiple sclerosis, and terminal illnesses.

9. Can you go on long term disability for anxiety?

Going on LTD solely for anxiety is challenging, but possible in severe cases where you cannot function even with medication and therapy. Documentation from psychiatrists is needed to prove you cannot work in any occupation.

10. Who decides if you qualify for long term disability?

The insurance company ultimately decides whether to approve a claim based on medical records, written statements from doctors, and assessment by any independent physicians they ask to review the case.


Long-term disability insurance provides essential financial security if injury or illness prevents you from working. Policies replace a portion of your income for an extended period. Without LTD coverage, becoming disabled could devastate your finances and lifestyle.

Carefully calculate how much disability income you would need. Purchase adequate coverage - around 60-80% of your pre-disability earnings. Consider an individual policy to protect your income even if you change jobs.

Understand exclusions, limitations and definitions of disability before choosing a policy. Add optional riders to customize your benefits. Review your coverage periodically to ensure it keeps pace with your income needs.

Long-term disability insurance gives valuable peace of mind. Disability can happen to anyone. Make sure you have income protection if your paycheck depends on your ability to work.

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