Long-term disability insurance is a type of insurance that protects your income when you are unable to work due to a physical or mental disability. Unlike typical insurance products like life insurance that pays out a lump sum when a claim is made, long-term disability insurance pays out benefits over a long period of time, sometimes even decades.
How long your benefits are paid out for and how long you have to wait before your benefits start will vary based on the policy you purchased. Obviously, the longer the benefit period is, the more expensive you can expect the policy to be. The waiting period before benefits kick in is also a factor in the price.
If you are trying to understand your existing policy or looking at a new policy, here are a few key things you need to be aware of and understand.
The elimination period is the amount of time that must pass before your benefits start to be paid out.
Sometimes this is also referred to as the waiting period.
In order to qualify for benefits, you must remain disabled for the entirety of the elimination period. The elimination period serves a few purposes.
First, it helps to ensure that your disability really is a long-term situation and that your long-term disability insurance really is appropriate for the situation. Second, it helps to ensure that your short-term disability insurance does not overlap with the long-term disability benefits.
Elimination periods usually range from 30 days to 12 months.
You usually will have some choice in elimination periods when looking for a new policy. What elimination period should you select? That really depends on your financial situation.
Choosing a longer elimination period will give you much cheaper premiums, but if you do not have emergency funds to sustain you for longer periods should you become disabled and unable to work, you may put yourself into a real financial bind by choosing the less expensive option.
That being said, if right now you cannot afford higher premiums, you may not really have any other choice than to select a policy with a longer elimination period.
This is one of the reasons so many personal finance experts recommend people have money put away in an ‘emergency fund’.
One thing to keep in mind as well is that long-term disability benefits often pay out at the end of the month. That means depending on your approval, you could be adding another 30 days to your waiting time before you receive your first benefit check.
Long-Term Disability Insurance Benefit Period
Once you have made it through the elimination period, you will start receiving your long-term disability insurance benefits, but how long are those benefits going to last?
The benefit period, which is how long your benefits will last, is important to consider when shopping for a long-term disability insurance policy. Commonly, long-term disability policies pay out for 2, 5, or 10 years. Some will pay out until retirement age.
Five years is usually sufficient to cover people according to the Council for Disability Awareness, who state that the average individual disability claim lasts for a little under 3 years.
Since 5 years is usually enough to cover most claims, premium rates are usually not much more expensive for longer periods of time. The price difference between a 5 year benefit period and one that will last until retirement is not all that much.
Being covered until retirement is especially beneficial for certain professions. Professions that require fine motor skills such as surgeons benefit from protecting their income until retirement if their disability prevents them from ever using those skills again.
Likewise, professions that typically can find themselves in a lot of debt will see particular value in having coverage until retirement. Legal professionals who often graduate with a lot of educational debt are an example.
If you can afford the slight premium increase, it often makes sense to make sure you are covered until retirement.
When looking at pricing of policies, the two areas you want to pay attention to besides the benefit amount is the elimination period so you know how long you might have to wait to start receiving benefits and the benefit period so you know for how long you can expect to receive those benefits.