Long-Term Disability Insurance

Long-Term Disability InsuranceWhether you are a construction worker during the workweek or a base-jumper on the weekends, the dangerous aspects of these lifestyles can increase your chances of becoming disabled and not being able to work. No matter what your high-risk occupation or hobby may be, you may benefit from a long-term disability insurance policy, which can provide an income while you are unable to work.

In today’s world, about 25 percent of 20-year-olds may experience a disability before they retire. According to the Council for Disability Awareness, the average long-term disability absence from work is 2.5 years. The following are the top causes for disability claims:

  • Musculoskeletal/connective tissue disorders, like Lupus and Rheumatoid arthritis: 27.5%
  • Cancer: 14.6%
  • Injuries and accidents: 10.3%
  • Cardiovascular/Circulatory: 9.1%
  • Mental disorders: 9.1%
  • Nervous system-related: 6.9%
  • Pregnancy and childbirth: 5.1%

Having a disability like those listed above can affect your ability to work and support yourself. Your income may decrease, making it more difficult to pay your bills and other costs of living. Long-term disability insurance helps to protect your income, should you miss work for an extended period of time due to an illness, disability, or accident.

This coverage kicks in when a short-term disability insurance policy expires, which typically occurs after three to six months. Long-term disability insurance pays 50 to 70 percent of your salary, depending on the policy. These benefits can last until you are healthy and able to go back to work or up to a specified number of years, depending upon your specific policy. Some polices will pay out as long as you are disabled up until the age of 65.

Be sure you understand what your insurance policy does and does not cover. Certain diseases and long-term health conditions will not be covered under long-term disability insurance. Additionally, certain plans will cover part of your pay if you are no longer able to work your specific occupation. Other plans will expect you to begin a job that you are capable of performing.

Types of Long-Term Disability Insurance

Group Insurance

Typically, long-term disability is part of your employer’s comprehensive employee benefits package. On average, the annual premium for a group insurance plan is $213 per person in 2011. That’s if your employer provides you with the option to have long-term disability insurance as a benefit of employment. If you are left to pay for the premiums with your after-tax dollars, then the disability benefits will not be taxed. However, if the employer is paying for the policy, then the benefits will be taxed.

There are type types of group policies: non-cancellable and guaranteed renewable. In order to obtain a non-cancellable policy, you need to take a medical exam prior to being approved. Once the policy begins, it cannot be cancelled and the premiums cannot increase. A guaranteed renewable policy also cannot be cancelled, unless you stop paying your premiums. The insurance company can increase the premium rates, however.

The benefits of being part of the group insurance option is that the insurance company will work with you and your employer to ensure that you are healthy and able to get back to working full time. Often, the disability payments will only be part of what you were originally making at your job. This is because the claim manager will usually define you as “partially disabled”, meaning you are still able to work another job, albeit for less money.

If you are only able to work part-time for 20% of your original pay, then you are likely to receive the full benefits of your disability insurance. This is not to say that full benefits equal full pay. For example, the full benefits may be 60% of your $40,000 annual salary, or $24,000.

Other benefits of a group insurance plan include dependent care reimbursement for childcare expenses and no premium payments while receiving disability benefits for more than 90 days. The benefits will also increase at a similar rate as inflation and/or salary increases, as well as the cost of living.

Individual Insurance

Some companies do not offer long-term disability or do not provide adequate coverage. In this instance, you may want to purchase a secondary policy. It is also an option for people who work for employers that do not provide benefits and for self-employed individuals who want disability coverage. Premiums and available benefits for individual coverage vary from company to company, and can also vary based on occupation. Premiums tend to be higher for polices that provide more monthly benefits and polices that offer benefits for a longer period of time.

Under an individual insurance plan, there are options for covering part of your salary, bonus income, and financial assistance when changing jobs. Keep in mind that the younger and healthier you are when you purchase coverage, the less expensive it will be (just like health and life insurance).

High-limit disability insurance is another form of disability insurance to be considered. With this type of coverage, benefits will equal 65 percent of the income of the person, regardless of the income level. Coverage typically is issued supplemental to standard coverage. With high-limit disability insurance, benefits can be anywhere from $2,000 to $100,000 per month. People who should consider high limit disability are those who earn more than 100,000 per year and for whom a standard plan is insufficient to cover their lost wages. This insurance will accept you, no matter your salary. Compared to the weekly earnings of a top-earning employee, normal disability insurance has a payout cap that is too small to cover their lifestyle.

Key person disability is one other form of health insurance coverage. It is a life or disability policy and is also called key man, key executive, and key employee coverage. With this form, benefits are provided to protect a company from the financial hardship that may result from the loss of a key employee due to a disability or death. There are several people that can be covered under this insurance: owners, founders, key workers, and top shareholders. Under this plan, the business acts at the primary insurance holder and beneficiary. The premiums are paid by the business, but it also receives the payout if a key employee dies or is disabled. The payments received can be used to cover day-to-day expenses, money owed to investors, and debts. If the business chooses to do so, it may also name the key person’s spouse as a beneficiary as well. The spouse would then pay part of the premium and receive part of the death benefit.

The following is an example of the way that key person insurance can be used:

“A software company founded by three software engineers could take out a key policy on all three of the founders with a “first to die” provision. Upon the death or disability of one of these founders, the policy would pay benefits to the company. The policy would no longer apply to the two remaining founders. The policy payment would be used to replace the efforts of the first founder (hiring personnel, covering loss of sales, etcetera).”

You may want to consider purchasing key person insurance if the death or disability of a particular employee would affect business continuity, the future growth of the company, inability to quickly replace the employee, or if the person is between 30 and 55.

Contact Your Insurance Agent

Most employers cover themselves by having workers compensation policies in place, but if you are left to purchase your own disability insurance, you can contact your local independent insurance agents to learn more. Your agent will have the expertise and experience to recommend the right policy for you.

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Enhanced Insurance is not written by attorneys. If you’re looking for legal advice, you need to contact a lawyer. Further, insurance practices and forms change constantly and are varied from state to state. For definitive answers in your area, contact a local agent.

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