Individual Long Term Disability
Key Factors of Individual Long Term Disability
Definition of disability. Some policies pay benefits only if you are unable to perform the duties of your normal occupation, while others will pay only if you cannot work in any job at all.
Payment trigger date. Some policies will allow you to decide when the payments begin. You can choose a waiting period at the time of your application.
Extent of disability. Some policies require that you be totally disabled before payments begin. Other policies pay out for partial disability for a limited time, but most often only if the partial disability follows a period of total disability for the same cause.
"Residual" benefits. Residual benefits can help make up the difference in your income if you are able to work, but are limited in your responsibilities due to your disability.
When payments begin. You can choose to begin receiving disability payments anywhere from 31 days to the first six months. The longer you wait for a payment start date, the less your premiums will be.
Length of coverage. Generally, coverage will pay you for two years, five years, or until you turn 65. The longer you receive payments, the more your premium will be.
Keeping pace with inflation. You can purchase a cost-of-living adjustment (COLA) to add to your basic disability insurance policy. This provision generally increases payouts by 4 to 10 percent each year.
Waiver of premium. Most policies contain a "waiver of premium" provision so that you do not have to pay premiums if you are disabled for 90 days or longer.
Source: National Organization on Disability
Chances of Becoming Disabled
The chances of becoming disabled are simply underestimated by most people. According to the U.S. Census Bureau, the average American has a one in five chance of becoming disabled. Studies show that more than 152 million people between the ages of 21 and 64 have some form of disability. According to the American Council of Life Insurers, a person age 35 is six times more likely to become disabled than die before he or she reaches age 65.
Becoming disabled eliminates a person's most valuable asset, their earning potential. While some people can get by without working for a few months by using their savings, few people can afford to stop working altogether for an extended period of time. LTD policies provide the insured with income for a period of time, such as two years, five years, or until they retire. Although most people rely on the LTD insurance that is provided by their employer, a solid financial plan should include an individual policy. There are several important differences between an employer sponsored plan and an individual policy. The most important difference is an income tax free benefit.
Long Term Disability Basics
Long term disability picks up where short term disability leaves off. Once the STD benefits expire, generally after three to six months, the LTD policy pays the insured a percentage of their salary, usually 50, 60, or 66 2/3 percent. Benefits are received until the age of 65.
If premiums are paid with after-tax dollars, the disability benefits will be tax-free. If premiums are paid by the employer with pre-tax dollars, the disability benefits will be taxable. Once the benefit begins to pay out, premiums no longer need to be paid.
Buying Individual Disability Insurance
If an employer does not offer group disability insurance a person should seriously consider buying an individual LTD policy. According to the ACLI, a 35-year-old person who has a disability for 90 days is likely to be disabled for an average of three years. Living for three years without to ability to earn income could be financially devastating.
Individual disability pays a flat amount each month, and most often a policy will not a pay more than 80 percent of current income. The premium is determined by the insurance company once they have examined occupation, income, and other in force disability insurance. Once the rate is determined, the insurance company places the insured into a rating class with people who have similar characteristics such as age, occupation, medical condition, and income.
Most policies are sold on a "non-cancelable" or a "guaranteed renewable" basis. Non-cancelable means that once a medical exam has been taken and the insurer issues the policy, the insurer cannot cancel the coverage or raise the premiums. If a policy is purchased on a guaranteed renewable basis, the insurer cannot cancel the coverage as long as the premiums are being paid, but it can raise rates. However, the insurer cannot raise rates on an individual basis. Rather, it will raise the rates of an insured group that has experienced a very high number of claims.
Generally, disability policies will provide coverage for two years, five years, or until the age of 65. Most individual policies also have features that allow benefits to keep pace with inflation or gradual salary increases, such as a cost of living adjustment (COLA), which adds a percentage to the amount of coverage each year.
Though an individual disability may at times seem like an unnecessary expense, it is an essential part of a complete financial plan. Since people are much more likely to become disabled than they are to die, one can make an argument as to why disability insurance is even more important than life insurance.
Most Common Causes for Claims
- Cancer: 13 percent
- Pregnancy complications: 12 percent
- Back injuries: 11 percent
- Cardiovascular: 9 percent
- Depression: 5 percent