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Best Individual Long Term Disability Insurance
You might think that because you aren't in a hazardous occupation there is little to no chance that you could become disabled. However, the unfortunate reality is that for 20-year-olds more than 1-in-4 of them become disabled before reaching retirement age.1
Learn how you can protect yourself and your family financially with long-term disability insurance.
What is Long Term Disability Insurance?
Our definition of Long Term Disability Insurance (LTD) is based on an individual policy and not group long-term disability insurance.
We would define long term disability insurance as a contract between the insured and the insurer that provides tax-free income to the beneficiary if the insured is too hurt or sick to work at their regular job for a prolonged period.
How much does long-term disability cost?
The price of a private long-term disability policy is going to be based on a combination of factors. First, the policy and riders you choose will influence the price. The insurance company will also use your age, gender, job, and income level when determining how much your policy will cost.
Your occupation plays a large role in this. Namely, if you have a much higher risk of becoming disabled from your job, your policy will be more expensive.
If you want to get an idea of how much a long-term disability policy would be for you, check out the disability insurance company Breeze and you can get a quote in 15 minutes.
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How does long-term disability insurance work?
Please note that this article is focused on individual long-term disability (LTD) insurance, not group. Although there are many similarities, our focus and the information provided is geared to individual disability insurance.
After you file a private disability insurance claim, your long-term disability income insurance policy will include an elimination period.
The individual disability insurance elimination period is the amount of time that must pass before you start receiving your benefit from the insurance company. An elimination period on LTD insurance can be as short as 30 days, all the way out to 730 days, depending on the insurer and how you design your policy. You need to take into account how much you can pay for disability insurance premiums balanced with how long you can go without receiving an income stream.
Longer elimination periods can be buffered when they coincide with other insurances such as worker compensation benefits, state disability or other short term disability insurance policies. For example, you may want to think about combining a 1-year short term disability policy with a long term disability policy with a 365 day elimination period.
Upon the end of your LTD insurance elimination period, the insurer will begin sending your monthly benefit amount to you, which you can use for whatever you need it for. Your benefit amount can vary but usually caps out around 50-60% of your typical monthly gross income. Since you paid for your policy using after-tax dollars, you will not be taxed on the monthly benefit amount you receive from the insurer. So, the 50-60% benefit is very close to your actual gross income before taxes.
The disability benefit period will determine how long your monthly benefit amount will continue. Once again, you choose how long of a benefit period when applying for your disability insurance. Your choice on how long of a disability benefit period you want is based on the premium you are willing and able to pay and on the occupational class you qualify for. The benefit period on long term disability insurance is typically 2 years, 5 years, 10 years or to age 67. Existing coverage can even last until age 75 if you are employed full time.
You will need to be aware of a few features of your long term disability insurance policy, such as how long it is guaranteed renewable, the type of occupation it covers and if it is non-cancelable.
Guaranteed Renewable vs Non-Cancelable
The guaranteed renewable provision in your policy lets you know how long you can keep LTD insurance going. For example, some LTD policies are guaranteed renewable to age 60. But upon age 60 the policy terminates and you will not have your LTD insurance in force any longer. Alternatively, some LTD policies provide guaranteed renewability to age 65, age 67, or even to age 75. And although the policy provides guaranteed renewability, your long term disability insurance rates can increase unless the policy is also non-cancelable.
Non-cancelable is a good benefit to include in your LTD policy because it provides you with the stability of locked-in fixed premium payments for the duration of the policy. Further, the insurance company cannot cancel the policy or reduce your policy benefits during the non-cancelable period. Depending on the insurer, the non-cancelable provision in your LTD policy is reserved for preferred classes of occupations, usually Class 6A to 4A. See our list of occupational classes below.
Any Occupation vs Own Occupation
Two additional key terms you need to be aware of when putting together your disability insurance plan are the terms any occupation vs own occupation. These terms determine the type of disability you have and if your will qualify for the LTD insurance benefit based upon factors such as your disability and current employment status.
A total disability definition under an Any Occupation or Any Gainful Occupation policy refers to your inability to work in any occupations that you are able, based on your education and skills. If you are disabled and unable to work you will receive your benefits. However, if you can still work, albeit not in the same occupation you previously had, you may not be eligible to receive disability insurance benefits or only partial disability monthly benefits. Any occupation definition of disability is broader, and therefore it provides lower long term disability insurance premiums than the own occupation disability definition.
The definition of total disability under a True Own Occupation Policy refers to your inability to do the substantial and material duties of your own occupation due to either an accident or sickness, even if you only have a partial disability or residual disability, and are now working at another job. If you spent the last 8 years of your life getting qualified for your job through rigorous education, training and experience, the last thing you want is to be told you can simply get “another” job. So, own occupation allows you to receive your disability insurance benefits, even though you have a “new” job, but are unable to work in your previous occupation you just busted your butt to qualify for.
Another thing to consider is if you can work under the any occupation disability definition or own-occupation disability definition, but it is for less money than you were making prior to your disability, the insurer will typically pay you a decreased proportional amount to help make you “whole” compared to where you were financially before the disability.
An example of a proportionate disability benefit in action would be if your income prior to your disability was $6,000 a month. Your total disability income benefit is 60% or $3,600 a month. But you can return to work, but only at 50% income levels prior to your disability. So, you would be making $3,000 a month at work. The residual disability benefit would kick in and pay the other 50% of your total disability income benefit, $3,600/2, or $1,800. Now you have $3,000 taxable income and another $1,800 tax free disability income benefit, assuming you paid your policy premiums with after tax dollars.
Presumptive Total Disability
Disability insurance companies will presume you are totally and permanently disabled if you suffer an injury or sickness that results in your complete and irrecoverable loss of hearing, speech, sight or use of both hands, both feet or one hand and one foot.
For some companies, if your disability falls under the umbrella of presumptive total disability, the company may waive the elimination period and pay you the policy's total disability benefits for the full length of the benefit period even if you return to work in another occupation.
Long Term Disability Insurance Pros and Cons
A lot of people who we speak to about LTD insurance wonder if long term disability insurance is worth it or they ask if do I need long term disability insurance coverage. Let’s look at the pros and cons to help you make your own decision on whether or not long term disability insurance is right for you-based on your unique needs and objectives.
Pros of long-term disability insurance
1) Income Replacement
The monthly benefit will provide income replacement so that you can pay your bills, such as other insurance, a mortgage, credit card debts, or whatever other monthly expenses you need to cover.
2) Tax Free
Your long term disability insurance benefit is income tax free. Since you paid for the policy premiums with after tax dollars, there is no associated tax on the benefit payout form the insurer.
3) Quality of Life
Your disability insurance coverage will provide a quality of life that you would otherwise lose if you did not have the policy. Consider how your life would look if your income suddenly stopped.
4) Asset Protection
And your disability insurance provides protection for your other assets, such as retirement accounts. If your income were to dry up tomorrow, apart from taping into your 401k or IRA, what other source of income would you have?
Cons of long-term disability insurance
The policy is not free so you have to factor in the premiums you will need to pay into your budget.
Disability Income Insurance Riders
Own-Occupation Disability Definition Rider: You can extend the own occupation total disability definition from 2 years to the full length of the policy.
Automatic Benefit Increase (Enhancer) Rider: A featured no cost rider that will increase your monthly benefit after the first year of the insurance benefit has been paid for a period of 5 years or more, based on the specific disability insurance company's options.
Guaranteed Insurability Rider: allows you to increase your disability policy coverage by purchasing additional amounts of coverage without requiring proof of insurability.
Return of Premium Benefit Rider: If you want disability insurance but would like something in return in case you are one of the lucky (blessed) people to not suffer a disability, you can get all or a portion of your premiums returned by policy lapse or cancellation, your death, or the end of the policy guaranteed renewability period.
Waiver of Premium Rider: When you are disabled the last thing you want to concern yourself with is making your disability insurance premium payment. The waiver of premium rider kicks in when you begin receiving your benefits, waiving your premium due during the benefit period.
Critical Illness Benefits Rider: If you are diagnosed with a qualifying disease, the insurance company will pay you up to $25,000 in a lump-sum benefit.
Hospital Confinement Indemnity Benefits Rider: If you are confined in a hospital you can receive up to $500 for each day. And if you are in intensive care the benefit amount doubles.
Group Long Term Disability Insurance
If you have long term disability insurance through your employer you should be aware of some potential negatives. Although it is great to have some coverage in place, there are important benefits of supplemental disability income insurance that you own and control.
Group LTD insurance Considerations
1. Lower cost since your employers pays the premiums
2. Is it portable? I.e. can you take the policy with you when you leave your employer?
3. If you employer pays the premiums, your disability income benefit will be taxed.
4. Often the definition of total disability is broadly construed, leaving it open to interpretation and forcing you to get any job, rather than the occupation you specialize in.
5. Do you know how long your group disability income insurance policy benefit period will last? If a disability lasts more than 90 days, the total disability duration will average between 2-4 years.
Who Should Get Long Term Disability Insurance?
Anyone who is gainfully employed, either as an employee of a company or a business owner. If you earn income, and if a disability would cause that income to be in jeopardy, you should consider long term disability insurance.
Consider your own lifestyle. Maybe you do not have a dangerous or hazard occupation but you engage in a lifestyle that has the potential to bring about a disability. Maybe you engage in dangerous hobbies, or you simply enjoy taking a trip to the mountains for an annual ski retreat; be aware that the more active your lifestyle, the higher your risk of suffering a debilitating injury.
For businesses, you should consider key person disability insurance in addition to key person life insurance. If a key employee is disabled, the key person disability insurance will provide the needed cash influx to support your business while you work to find a replacement or give your key employee time to rehabilitate.
For business owners, particularly where there is more than one owner, a buy sell agreement with life insurance and disability insurance will provide protection for both death and disability of a business owner.
Different Occupation Classes
There are different occupational classes available. The higher the occupation class the lower the risk (and the disability insurance premium rate). Depending on the company, the Occupational Classes range from 6A to Class 1A (with various nuances) to even Class N or B or 2 or whatever other letter or number that particular insurer decided to use to denote uninsurable risks. The classes generally focus on how hazardous the work is and how hard it would be to return to work.
This is the top class and is for “stable” executives in an office who don’t travel much, if at all; who don’t work in a hazardous environment; and who don’t supervise people that have manually responsibilities, i.e. you are not around laborers in a potential dangerous environment. Some examples of occupations with a Class 6A rating would be CPAs, Business Executives, Registered Pharmacist, Attorney, etc.
For many of the best long term disability insurance companies, there is no real distinction between Class 6A and Class 5A. As best as we can explain, the primary difference would be which occupation is “safest” would be Class 6A and the step below would be Class 5A. When shopping disability insurance quotes, there does not appear to be a big difference in premiums between the two classes. Some examples of occupations that would fall into the disability insurance Class 5A would be Real Estate Brokers, College Deans or Professors, Newspaper Columnists, Small Animal Veterinarians, etc.
The Class 4A occupational underwriting criteria would be focused on professionals and certain white collar occupations such as Large Animal Veterinarians, Advertising Account Executives, Ministers/Pastors/Rabbis, Disc Jockeys, Nurse Practitioners, etc.
This class is represented by occupations with minimal environmental hazards consisting of professionals and managers, such as Acupuncturists, General Managers, Athletic Directors, Banking Cashier, Dentist, Surgeon, etc.
Class 2A is geared towards occupations that may require moderate travel or manual dexterity or light physical exertion. Occupations in Class 2A include Barbers, Butchers, Golf or Tennis Pros, Dental Hygienist, etc.
Occupations in Class 1A are going to require more physical exertion and be in more direct contact with hazardous environments. Occupations may include Carpenters, Driving School Instructors, Hairdressers, Zoo Workers, Painters, etc.
Long Term Disability Insurance Uninsurable Occupations
Uninsurable occupations would include jobs that involve hazardous work conditions or that have lower job stability.
Some examples would be:
- Crop Dusters,
- Day Traders,
- Flight Attendants,
Alternatives to Long Term Disability Insurance
If you have a lot of funds stashed away for a rainy day you can always self-insure. But you can probably see the problem with that already. If you don’t have some sort of passive income set up in advance of your disability, your assets will dry up fast.
Family and Friends
You can always ask family and friends for help. However, your friends may no longer be friends after you have hit them up for the third month in a row and you might be wondering why your family never answers the phone anymore.
Maybe your disability is severe enough that you can squeeze into the parameters required to receive social security disability insurance (SSDI). However, the average monthly benefit from SSDI is around $1,200 a month so it will certainly not get you very far.
Long-term care insurance
Long-term care insurance is valuable to have, whether your chose it in conjunction with or as an alternative to, disability insurance. However, just know they are not the same thing. Long-term care insurance provides a monthly benefit t you are unable to perform 2 of the 6 Activities of Daily Living (ADL’s). The 6 ADL’s are Continence, Bathing, Eating, Dressing, Toileting, and Transferring (getting around). Cognitive disability is an additional qualifying event that triggers a long term care rider. It is meant to provide money to you if you are in a nursing home, in home care, or in an assisted living facility.
Should I combine my disability insurance with my life insurance policy?
Some companies offer disability income insurance riders that you can attach to term life insurance or permanent life insurance. The key would be whether or not the disability income rider fits your specific requirements. If you don't have a life insurance policy in place, then it makes sense to shop life insurance with and without the disability income insurance coverage to see if a combined life insurance and disability insurance policy is best, or if you would be better off with a separate individual disability insurance policy.
- Social Security Administration, "Disability facts"