long term disability insurance (LTD) is an insurance policy that protects an employee from income loss if he or she is unable to work for an extended period of time due to illness, injury, or accident. Without the financial safety net provided by a long-term disability insurance policy, this can financially devastate a family.
Long-term disability insurance does not cover accidents or injuries at work that are covered by workers’ compensation insurance. They do, however, cover an employee in the event of a personal injury, such as a car accident or a fall.
Continue reading to learn more about the coverage, how it works, why you should have it, and much more.
What does long term disability insurance do?
Long-term disability insurance is a type of income protection designed to cover serious injuries and illnesses that keep you from working for three months or longer. This includes permanent disabilities that prevent you from returning to work.
Disability is defined as being unable to perform the duties of your job with reasonable continuity due to sickness, injury, or pregnancy during the benefit waiting period and the first 24 months for which LTD benefits are payable.
You are considered partially disabled during this period if you are working but are unable to earn more than 80% of your indexed pre-disability earnings.
Long-term disability insurance is a wise investment for healthy, working people who want to secure their financial future by protecting themselves from long-term injuries and illnesses.
Why is long-term disability insurance important
Here are the reasons why long term disability insurance should have a place in your employee benefits plan.
- Provides Income Replacement
- Accidents Happen
- Attract and Retain Top Talent
Provides Income Replacement
Nobody wants to think about needing a product like long term disability insurance, but it can supplement lost income in cases where an employee is unable to work and earn an income for an extended period of time. This provides financial support for the family, lessens the financial burden, and hopefully helps to make a very stressful situation a little less stressful.
Accidents Happen
A 30-year-old has a fourfold greater chance of becoming disabled than of dying before the age of 65.
Attract and Retain Top Talent
Disability insurance is a highly desired benefit. Prospective employees are increasingly interested in an employer’s benefit plan. The better the plan, the more comprehensive it is, and Disability Insurance are near the top of the priority list.
How does long term disability insurance work
Disability insurance, like a paycheck, pays out approximately 60% of your non-taxable income on a regular basis. Some people receive long-term disability insurance as part of their employee benefits package, but it may not be adequate. To obtain adequate coverage, most people require their own long-term disability plan.
Our disability insurance calculator can help you determine how much coverage you require.
You pay premiums for a long-term plan, and when you become disabled, you file a claim with details about your diagnosis and proof that you are unable to work.
Following the waiting period, you will begin receiving benefit payments. When you return to work, your disability insurance payments usually stop, but you may be able to extend your coverage with a rider. You can always cancel your long-term disability insurance policy if you want to.
Is Long Term Disability Insurance a Good Idea?
Now that you understand how long-term disability insurance works, you may wonder if it is a good idea to pay the premiums. Finally, acquiring disability insurance can be a wise and safe choice if you do not want to be concerned about your income in the event of a long-term disabling injury or illness.
Nonetheless, it is reasonable to acknowledge that people frequently choose not to obtain long-term disability insurance. For starters, it is expensive. Long-term disability premiums can be expensive depending on your plan, your age, your health, and your specific policy.
Younger people with less disposable income may choose to forego long-term disability insurance, even though the premium is lower the younger and healthier you are. Some people may also choose not to purchase LTD insurance if they rely on someone else to support them in the event of disability, such as a spouse or family member. If any of these reasons apply to you, you should take them into account when deciding whether or not to purchase LTD insurance.
However, you will want long-term disability insurance for a variety of reasons, not the least of which is that you never know when you will develop a disabling illness or sustain a debilitating injury.
Long term disability insurance cost
LTD insurance premiums typically range between 1% and 4% of your current income.
The cost of disability insurance is determined by several factors. They are as follows:
- Benefit amount. LTD insurance usually replaces 40 to 65 per cent of your pre-tax earnings. The higher that percentage, the more expensive your disability insurance will be.
- Benefit period. The period of eligibility for disability insurance income can range from a few months to your reaching retirement age. The cost of your disability insurance generally rises as the benefit period lengthens.
- Elimination period length. Almost all disability insurance policies require a waiting period before you can receive benefits following an injury or illness. The elimination period for can range from a few days to two years for LTD insurance. You can save money on disability insurance by selecting a longer elimination period.
- Your age.Because the likelihood of suffering an injury or illness increases with age, so will the cost of disability insurance. Purchasing disability insurance when you are young is often a wise decision because it is less expensive and you may be able to lock in a low rate.
- Your health. If you are in poor health, smoke, or have a family history of chronic disease, you will most likely pay more for disability insurance. Some disability insurance companies will allow you to exclude an existing illness or disability; however, you will not be able to collect disability insurance income if the excluded illness or injury makes it impossible for you to work.
- Your occupation.The risks of your job, as well as the salary it commands, factor into the cost of your disability insurance. More dangerous jobs and higher-paying jobs are typically more expensive to insure.
Long-term disabilities covered?
Disability insurance can protect you from the financial ramifications of an injury or illness that prevents you from performing your regular job duties.
Many policies will pay you a monthly benefit if you are unable to do your job for an extended period of time but are capable of doing other types of work.
If a policy states that you do not qualify for benefits unless you are “unable to do any kind of work,” it means that you will not receive benefits even if you can work in another type of job.
Are long term disability insurance payments tax deductible?
In many cases, you’ll have both pre-tax and post-tax disability insurance. Pre-tax disability insurance is most likely provided by your employer’s group plan (which is available to all employees), whereas post-tax disability insurance is typically purchased on your own.
The tax treatment of your disability insurance premiums is an important planning consideration because it affects whether or not you will owe taxes on your benefit if you become disabled. A financial advisor can help you understand how disability insurance fits into your overall financial plan and anticipate the tax implications of various aspects of your plan.
FAQs about long term disability insurance
What qualifies for long-term disability?
In general, you may be eligible for long-term disability benefits if you: Purchase a long-term disability insurance policy. Have a medical condition that your insurance policy considers to be a disability. Make a long-term disability claim with your insurance company.
Is it worth it to buy long-term disability insurance?
The benefits of purchasing long-term disability insurance generally outweigh the drawbacks, especially if you can find an affordable policy. Pros: If you pay for your policy with after-tax dollars, your benefits are tax-free. You are free to spend the benefit however you see fit.
What is long-term disability insurance through an employer?
Long-term disability insurance is a type of income protection designed to cover serious injuries and illnesses that keep you from working for three months or longer. This includes permanent disabilities that prevent you from returning to work.
