Thoughts on Long Term Disability Insurance

Written by nickel - 19 Comments

I’ve always subscribed to the notion that you should insure that which you cannot afford. Thus, we’ve been very good about doing things like keeping our life insurance coverage up to date and otherwise protecting our assets. Recently, however, I’ve been thinking more and more about long term disability (LTD) insurance as I’m concerned that we don’t have enough.

First, a bit of backstory… We have four young children, and my wife stays at home with them. Thus, I’m currently the sole source of financial support for our family. I have decent LTD coverage through work, but it really wouldn’t be enough to comfortably support us if I were disabled for a long period of time…

There’s a 60 day waiting, at which point the LTD coverage kicks in and replaces up to 60% of my salary. So if I’m not eligible for Social Security disability payments, the insurance will pay 60% of my income. But if I am eligible for other benefits, the insurance will top us off to provide a total of 60% income replacement.

The good thing about about this coverage is that it’s cheap, and it’s a good start. The bad thing is that it, like I said above, I’m the sole source of financial support for our family, and this coverage would leave us well short of a comfortable lifestyle if I were out of commission for an extended period of time. Moreover, it only applies to my “regular” income, and thus wouldn’t help make up the additional shortfall if my self-employment were adversely impacted.

So… I’m in the market for a supplemental LTD policy. Unfortunately, I know very little about what to look for, how much I can expect to pay, etc. Thus, this will be a major learning experience for me.

One interesting tidbit that I’ve run across thus far is that, because my employer-provided LTD is paid out of pre-tax dollars, the LTD income replacement will be taxable (further diminishing the value of 60% income replacement). In contrast, private policies are paid out of your pocket (with post-tax dollars) and the benefits are typically tax free.

Published on November 2nd, 2007 - 19 Comments
Filed under: Insurance, Working
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Comments (scroll down to add your own):

check with professional orginzation you belong to I know ASCE (Civil Engineers) provides LTD, although it is very similar to your work plan.
Comment by Rob — Nov 2nd 2007 @ 10:41 am
I got LT disability about year ago. I’m very happy with the decision. Wish I did it sooner because I have pinched nerve and as a result my policy doesn’t cover my spine which really sucks.

The other thing about getting LT outside of the company is the taxation of the benefits. Most of the time LT disability is paid pre-tax by the company and as a result the benefits are taxable. If you buy LT disability with after tax dollars the benefit is not taxable which I think is a worthwhile tradeoff.
Comment by dong — Nov 2nd 2007 @ 12:37 pm
Read the terms of your policies carefully. My LTD pays up to 60%, if I have another insurance policy, then it will still only top up to 60%.
Comment by plonkee — Nov 2nd 2007 @ 2:15 pm
Hmmm…I think I may need to review my coverage more closely (I buy my own insurance). Not certain about the extent of my coverage.

However, my very low premium insurance covers primarily disasters as my deductible and out-of-pocket requirement is high.

Since you have a wife and 4 kids, you probably need the coverage more than someone like me who currently has no dependents.

-Raymond
Comment by Money Blue Book — Nov 2nd 2007 @ 3:33 pm
My employer provides LTD … but advised me that most people who go on it are terminated. Don’t know if that’s something you would have to deal with, but if so, it could play a significant role in your decision-making…
Comment by H Lee D — Nov 2nd 2007 @ 8:41 pm
Good luck with that. Usually the highest you will find is 60-80 percent of gross earnings. The thought behind that being to prevent overinsurance and to reduce moral hazard and malingering. Can’t help you on costs though. Just shop around and read the policies.
Comment by Jon — Nov 3rd 2007 @ 9:04 am
Jon is right. It is difficult to get coverage for more than 60% of your income. The insurance company wants to make sure you don’t milk the insurance companies by faking a disability.

You may be able to get a supplemental policy like Aflac, but I bet it will be difficult to get another disability policy. Or, the cost will be very prohibitive. You may be better off building a larger emergency fund - like 12 months. If you need more than 60% of your pay and 12 months of emergency monies, then you are probably suffering a very severe disability and social security should kick in.
Comment by Swim Upstream to Wealth — Nov 3rd 2007 @ 9:56 pm
I definitely know what you’re feeling, I’m quite young (22), so I haven’t really thought about long term disability yet. Dave Ramsey constantly spouts the stat that you’re 6 times more likely to be permanently disabled than die before 65, so it’s probably something to get done one of these days. I hear it’s relatively cheap to do, especially if you’re in an office environment.
Comment by FinanceIsPersonal.com — Nov 4th 2007 @ 12:23 am
FIP: If you’re single with no kids and if your employer offers a policy, then you may have all that you need. Because of my situation, I don’t want my wife to be forced back to work before our family would otherwise be ready, so I’m in a fundamentally different position.

Comment by nickel — Nov 4th 2007 @ 9:39 am
I work in the federal court system, where an LTD plan was offered — through a third-party insurance company — and it cost me (via paycheck deductions) about $800/year at the time (about 8 years ago). Then one day I asked to read the policy and found it odd that the insurer dragged its feet in sending me a policy, as opposed to a plan summary booklet.

When I got the policy, it took me an hour to figure out that all the insurer was going to pay was a marginal amount of money because it excluded any Social Security Disability payments and — get this — it wouldn’t pay me anything unless I first qualified for SSD incapacity-wise (hence, you wind up having a claim with the insurer only if you’re so disabled that you actually qualify for SSD, and that’s REALLY disabled!).

Worse, the policy would also exclude “FERS” payments (basically a federal employee retirement plan that will start paying early if you’re effectively retired by an SSD-level disability) and any other third-party sources of income (unemployment, money from the person who rammed you with their car and thus disabled you, for example).

To be clear: The policy permitted the insurer to add all of those layers of payments together, then subtract the total from the 60% of income that it offered to replace. I figured that I would have wound up with just a marginal layer of economic benefit for my $800. I actually got one of the insurer’s lawyers on the phone to confirm all this and he agreed that it wasn’t a good deal.

On top of all that, the policy was hard to read — and I’m a lawyer!

My point: read the policy thoroughly, especially (1) it’s definition of how disabled you must be to get any payments at all; and (2) how much of other income, be it from SSD or welfare, an employer-benefit, etc, is excluded. Then ask yourself if you would pay $800/year, for example, for $10,000/year worth of coverage (I pay that much for $1 million of auto liability coverage, though I concede that LTD is a different animal).

Anyway, I’m convinced that very few people read these policies (right, it doesn’t benefit insurers to make them easy to read), and I see plenty of lawyers get rich when disappointed insureds sue their insurers over the holes cut into the Swiss cheese — precisely what some of these policies are.
Comment by Chris Desmond — Nov 4th 2007 @ 5:11 pm
I am also pretty sketched out by disability insurance. It sounds like a really good idea and necessary evil in theory, but I have NEVER heard of a LTD policy that didn’t have a ton of exceptions and ways to delay and deny claims, even on the expensive policies. No one I know who has used it has ever had a good experience and some people have even had to take the insurance company to court. It seems like it’s really safer to save up an extra large emergency fund for this reason, especially because it’s pretty expensive.

What good does it do you if it takes a couple months to kick in, excludes a bunch of stuff, and doesn’t even end up paying enough to cover your basic bills if you do in fact actually receive the benefit?
Comment by Sara — Nov 5th 2007 @ 12:32 pm
Thanks guys, I’ve been wondering what to write about, LTD it is.

LTD has gotten more expensive and more resrictive in the past 5-10 years ’cause people are USING it much more than they ever did. Back in the day, companies were more liberal with sick time and allowed employees to roll it over; then if after 20 years you needed surgery, you could use time off as needed. Now-a-days find three things wrong with the last sentence.

Find a agent that writes through several companies. Control the premium on a LTD policy by taking a higher deductible (the waiting period, tying this in with your emergency fund) and the length of the policy (usually two years..after which you’re eligable for social security disability); make sure the agent explains the restrictions and provisions of the policy. Good luck.
Comment by Ernesto — Nov 5th 2007 @ 1:59 pm
My husband had two or three LTD policies when he was disabled in 1994. He was 51 years old. One paid for life and one until he was 65, they started paying after 6 months. His company paid him commissions for that long. The policies paid $3,500. a month after that. With SSD and his health insurance and after two years, Medicare we had enough to live on and I didn’t have to worry about taking care of him and working full time. He lived another 5 and a half years. I was so very thankful that he had LTD insurance. I would advise you to get as much as you can. SS disability doesn’t pay enough to live on without another source of income in addition to it. It is expensive insurance but worth every penny if you need it. He was left a quadraplegic after getting a neuralogical disease. You never know what can happen in the future and it is best to be prepared for a possible disibility.
Comment by widow — Nov 5th 2007 @ 11:05 pm
At some employers, you are permitted to pay your portion of long-term disability insurance premiums post-tax. Doing so means a portion (the formula is based on how much of the premiums you paid pre-tax vs. post-tax) of any benefit is not taxable. As you know 60% of your salary post-tax is not a major financial hit compared to 100% of your salary pre-tax (especially so if you live in a high-tax state.)
Comment by Michael — Nov 8th 2007 @ 9:38 am
Watch yourself!!I was recently diagnosed with Multiple Sclerosis.My company has a clause in our policy that states if you become ill,that it has to prevent you from “doing” any job!So,for instance,you would have to be confined to a bed!
Otherwise,you would not be eligible,Great West Life and companies like them are doing this to get out of paying for actual long term and chronic illnesses.How many of us actually look over our companies LTD policy or understand it!
Comment by Hugh gagnon — Jan 28th 2008 @ 9:42 am
Hugh, you just validated what I said in my post above. So many news articles and financial planners urge everyone to get one of these plans, but I doubt any of them actually read such policies, and thus count the “holes” in the swiss cheese. Bottom line to most (I suspect) LTD policies: you don’t get bupkus unless you qualify for social security disability payments, and that basically means you can’t do ANY job. For the Social Security definition: http://www.ssa.gov/dibplan/dqualify4.htm
Comment by Chris Desmond — Jan 28th 2008 @ 1:03 pm
Is there a way to claim taxes so that pre-tax dollars for LTD premiums will not be taxed. Should your company be required to give you the option of pre or post taxed premiums?
Comment by Tami — Mar 24th 2008 @ 2:31 pm
I wanted to add to my earlier comment about how many advise us to get Long Term Disability but very few actually read such policies to count all the holes in them and thus determine if they’re worth the money. Here’s an article (admittedly biased in favor of plaintiff’s lawyers) somewhat illustrating my point:
http://www.lawyersandsettlemen.....nosis.html
Comment by Chris Desmond — Mar 26th 2008 @ 12:14 pm
This is so ironic, just today I was planning on getting LTD.
I am sooo confused though. I do not pay into Social Security, so my union just “recommends” companies.
Comment by nancy — Jul 24th 2008 @ 12:36 pm