How Does Long-Term Disability Insurance Work? // [2021 Guide]

Most people never stop to think about what would happen if they were unable to work for an extended period of time. However, that’s something that all of us should consider as a real possibility. In fact, the Social Security Administration states that 25% of all workers will become disabled before they reach full retirement age. That’s one out of every four people in the workforce! That is quite a staggering number, and even more reason for you to learn how long-term disability (LTD) insurance could protect you and your family in the unfortunate event that you become disabled. Keep reading as we explain exactly what LTD insurance is, how it works, and what you need to watch for when you buy a policy.

How Does Long-Term Disability Insurance Work?

Long-term disability works by replacing the income from your job after you have been injured and become unable to work. You complete an application with the insurance carrier, and they approve you and set your premium rates based on many different factors including your age, health, and occupation. You must pay your monthly premiums to keep your policy active. After suffering an injury that renders you disabled, then your insurance company begins paying you monthly benefits based on the specific language in your contract.

LTD insurance may be provided through your employer, and you can also purchase this coverage individually through private insurance carriers. The specifics of the disability coverage vary based on your situation and your insurance company, but there are several things that are similar across all policies. First, you must pay monthly premiums to keep your policy active. Next, long-term policies will have an elimination period that varies anywhere from 30 days to 12 months. This is the amount of time that must elapse between your injury and your first benefit payment.

The benefit amount will also vary based on the specifics of your contract language as will the benefit period. Some policies may only pay benefits for 2, 5, or 10 years. Others may pay benefits for life. Make sure that you fully understand your needs before applying and accepting an insurance policy. Lastly, the definition of disability is something that will be spelled out in your insurance contract. Some policies are known as “own occupation disability insurance”, and they allow you to receive benefits if you are unable to return to your previous work. Take a brain surgeon for example who suffers an injury to his hand. He is still able to perform work in some capacity but is no longer able to perform the duties of a brain surgeon.

Other policies are considered “any occupation disability insurance.” In this case, you will only receive payments if you suffer a disability that prevents you from working in any occupation. Typically, own occupation policies are preferred over any occupation policies, although they are more expensive.

You might also hear about short-term disability insurance and wonder exactly what that means. Short-term disability insurance kicks in more quickly without the extended elimination period associated with LTD insurance. Often, short-term and long-term policies work in tandem with each other. Your short-term policy will begin to pay benefits immediately and will hopefully last until your long-term disability payments start. So, now that you know how these types of insurance work, let’s talk about how much they cost.

How Much Does Long-Term Disability Insurance Cost?

The cost of a long-term disability policy depends on many factors. We will explore several of those here. On average, you can expect to pay anywhere from 1% to 4% of your annual salary in premiums each year. Let’s take a look at some of the factors that might affect that number.

Your Annual Income

This one should be fairly obvious. Since the goal of disability insurance is to act as a safety net and replace your income if you cannot work, then the higher your salary, the more an insurance company might have to pay you. Therefore, the higher your salary, the higher your premiums will be each month.

Your Age, Health, & Lifestyle

Just like with life insurance, your age, health, and lifestyle have great impacts on whether you might become disabled. These factors not only have an effect on your eligibility for insurance, but also the price you will pay for it. The older you are, the more likely you are to become disabled before reaching retirement age. Similarly, if you engage in dangerous lifestyle activities, then you can bet that you will be paying higher premiums. Someone who enjoys motorcycle riding, skydiving, and rock climbing will certainly pay more for their insurance policy than an individual who only enjoys sitting at home reading books.

Your health and medical history also play roles in the calculation of your monthly premium. If you have a history of pre-existing conditions like high blood pressure, cancer, or other medical conditions, then your premiums are going to be more. For most private plans, you will be required to complete a medical exam as part of the underwriting process. If you have a group policy, most of those are automatic-issue with no exam. Believe it or not, women will also pay higher premiums than men with all other things being equal. This is because they are more likely than men to suffer health issues that will cause them to become disabled.

Your Occupation

What you do for a living also affects the cost of your insurance. If you perform a high-risk job, then the likelihood of you becoming disabled is higher, thus leading to higher premiums. If you work an office desk job, then you can expect that your premium cost will be lower.

Policy Details

The details of your policy will also have a bearing on how much you pay each month. Things like your benefit amount, benefit period, and elimination period will all affect your premium amount. The lower your disability benefits and longer your elimination period, the lower your premiums will be each month. Conversely, higher benefits and a shorter elimination period will result in higher premiums for your long-term disability coverage.

How Much Does Long-Term Disability Insurance Pay?

You’re probably wondering, “How much does disability pay?” This answer depends on your individual policy. In general, a long-term disability insurance policy will replace anywhere from 60% – 80% of your income. Your benefit amount payout will be spelled out in the details of your policy contract. Some policies also allow for a cost of living increase each year. As living expenses increase, this adjustment can help you continue to meet your financial obligations. Some policies include this automatically while others require a special rider to include this adjustment.

Another situation that often arises is when a person suffers an injury and is no longer able to work in their current profession. They may be forced to take a lower paying job because of the injury. Some insurance policies will include benefits that help offset that difference. So, instead of replacing your entire income, they will replace the difference between your previous job and your current job.

What Does Long-Term Disability Insurance Cover?

This type of insurance can cover different types of injuries or disabilities. Unlike Social Security disability insurance or Supplemental Security Income, you need not suffer a total disability to get a payout from your long-term disability insurance. Some policies will pay if you can no longer perform your specific job while others will only pay if you cannot perform work of any kind. Some of the most common reasons people file disability claims are for cancer, pregnancy, skeletal injuries, and muscular or soft tissue injuries. Mental health disorders like ADHD may also qualify you for disability under your plan.

Long-term disability does not cover your medical expenses associated with your actual injury nor compensate you for the injury itself. You would turn to your health insurance for your medical expenses, and if you were injured on the job, you might be entitled to workers’ compensation benefits as well. Though SSDI benefits may be taxable, your LTD benefits will be received tax-free and not subject to income taxes as long as the premiums are paid with after-tax dollars. Your long-term disability plan will spell out exactly what constitutes a disability under the plan, so refer to your plan documents if you have any questions.

Conclusion

Unlike SSDI, long-term disability insurance plans are not administered by the SSA. These are private plans purchased either through a group long-term disability policy or an individual private policy. Given that the Social Security Administration states that one out of every four of today’s 20-year-olds will suffer a disability before retirement, you should strongly consider purchasing a policy to help protect you and your family. The premiums, payouts, and policy specifics can vary between insurance companies and depending on your personal situation. Make sure that you carefully read the plan documents and shop around for the best policy that meets your needs. If the time ever comes to file your claim, then you will be glad you did your homework!

Frequently Asked Questions

When am I considered disabled?

That depends on how your policy defines a disability. Though the SSA has strict guidelines on what is deemed a disability, private long-term disability insurance definitions can vary. Some policies may consider you disabled if you are no longer able to perform the same type of work you have done in the past. For instance, if you are a construction worker and suffer a severe broken leg, you might not be able to return to the construction site. However, you could probably work at a desk job just fine. Your policy might consider you disabled or you could have a policy that defines disability as being unable to perform any type of work.

This is why it is so important to understand your policy and how it works. The definition of disability is an extremely important part of your contract, and you should know exactly what it says before signing up and starting to pay your premiums.

When will my long-term disability benefits kick in?

Your long-term disability benefits will kick in immediately after the expiration of the elimination period. This is the waiting period between the occurrence of the disability and the start of your benefits. This amount of time varies between insurance policies. Some are as short as 30 days while others are as long as 12 months. On average, you should look for a policy with an elimination period no longer than 90 days. This helps to balance a lower premium without an extended delay in the start of your benefits.

How long can you stay on long-term disability insurance?

It depends on your policy. The maximum benefit period is spelled out in your policy and will state the maximum length of time that you may receive benefits. Some policies may pay for 1 year and others for 5 or 10 years. You can even purchase policies that will pay for the rest of your lifetime as long as your disability continues. There is no set rule for when disability insurance benefits will end as each policy and insurer sets their own rules on that topic.

Do you have to pay back long-term disability?

No, you are not required to pay back any of the benefits that you receive from your long-term disability. Just like any other insurance, you pay monthly premiums to keep your policy active. When you file a claim, then the insurance company must pay out your benefits per the terms of their contract with you. Your disability income insurance is intended to replace your income should you become disabled, so having to repay the money would defeat the purpose of the insurance.

What is short-term disability insurance?

Short-term disability insurance is insurance that helps replace your income when you are unable to work. Short-term disability insurance usually pays around 80% of your income, and most plans are purchased through group employer plans. There is generally no waiting period to receive these benefits or either a very short waiting period such as 14-30 days.

What is the difference between long-term and short-term disability insurance?

Short-term disability insurance is very similar to long-term disability. However, most short-term disability is provided through a group plan with an employer. In addition, there is usually no waiting period between the disability and the start of benefits. Many times, short and long-term disability plans work in tandem to help replace your income. Short-term disability begins paying almost immediately and generally lasts anywhere from 3-12 months. This is usually long enough for your long-term waiting period to expire and those benefits to start. The other main difference is that short-term disability usually pays a little more than long-term. On average, it pays out about 80% of your income while long-term pays only about 60%.

Elliot Marks

Elliot Marks

Author & Social Security Advisor

Elliot Marks has spent over 10 years providing clear and concise information to help Americans navigate the complex nuances of social security and many other government services in the United States. Elliot has a passion for helping those in need of these services to be able to find timely access to news and information that is relevant and helpful to their daily lives.