Long-term disability insurance is an important, yet often neglected type of insurance for professionals and business owners—and it’s commonly misunderstood. In this guide, we’ll explain everything the average person needs to know about long-term disability insurance, including how it works, when it pays out, and whether it’s worth purchasing for yourself.
The Basics of Long-Term Disability Insurance
We’ll start with some of the basics. Long-term disability insurance is a type of policy designed to financially protect people if they experience injuries or illnesses that prevent them from working for an extended period of time (or even permanently). If you’re out of work for three months or longer due to a qualified injury or illness, your disability insurance policy will kick in.
The policy itself works much like other types of insurance policies. You’ll purchase the policy when you’re healthy and actively working. Each month (or other recurring period of time), you’ll pay a set premium. Then, you’ll claim the benefits of the policy if and when you need them.
Your employer may offer a long-term disability insurance policy as part of your health benefits package. Otherwise, you may need to purchase a policy of your own.
Key Variables in Long-Term Disability Insurance Policies
As with other types of insurance, long-term disability insurance policies can vary significantly from one policy to the next. Each policy should specify:
- Benefit amounts. How much will you receive if you’re ever on long-term disability? In many cases, this is designed to replace your primary income.
- The benefit period. How long will you receive your benefits? Most policies kick in if you’re out of work for three months or longer, and some last indefinitely. But others have a fixed period when they remain active.
- The elimination period. After a disabling event, you must wait out the elimination period before collecting benefits. For many policies, this is three months.
- A definition of “disability.” Different insurance companies may define “disability” differently. Your insurance policy will have an exhaustive list of conditions and injuries that are considered disabling; in other words, it will formally state which conditions the policy will and won’t cover.
- The premium amount. Most policies have a set premium, which you’ll pay every month to keep the policy active. Some policies may allow this to be paid annually.
- Exceptions. You may be excluded from receiving benefits if you were disabled in a specific way; typically, policies don’t apply if your disability was the result of irresponsibility or extremely bad decision making on your part. For example, you may not receive benefits for intentionally disabling yourself, or for being disabled while committing a crime.
Social Security Disability Insurance (SSDI) vs. Private Insurance
By default, all taxpayers are enrolled in the Social Security Disability Insurance (SSDI) program, a federal-level payroll-tax based program managed by the Social Security Administration (SSA). Through SSDI, you may be able to collect disability benefits from the government for you and your family if and when you become disabled. This is different than private long-term disability insurance.
Many employees rely exclusively on SSDI for their disability protection. However, there are several potential issues with this:
- Disability definition. The SSDI has a much stricter definition of “disability” than most private insurance policies; if you want to qualify for benefits, you’ll need to meet a number of independent conditions simultaneously. The SSDI has a running list of conditions that are accepted as a form of impairment, and if yours falls outside this list, you may have difficulty collecting benefits. The severity of your condition will also need to be assessed.
- The application process. Applying for SSDI benefits is an arduous and lengthy process. You’ll need to provide the SSA with a ton of information, including detailed information about your past medical illnesses, injuries, and conditions, your current medications, your recent jobs, your current family members, and your previous earnings. You’ll also need to provide several documents, like your birth certificate and medical records. After that, you may be stuck waiting weeks, or even months, to begin the next steps of the process.
- Benefit payouts. Compared to private insurance, SSDI benefits are minimal. You’ll typically receive much more exhaustive benefits from a private insurance policy.
Choosing a Long-Term Disability Insurance Policy
Most working professionals feel more comfortable with a private long-term disability insurance policy than they do with the basic coverage of SSDI. If you want to purchase a long-term disability insurance policy, talk to your employer about the benefits they currently offer, and see if there are available options for you. If not, start reviewing different insurance companies and compare their policies apples to apples; eventually, you’ll find a trustworthy company offering a robust policy at a price you can afford.