In my opinion, it’s one of the most underrated and underused products in personal finance. According to the US Census Bureau, about 56.7 million people — 19 percent of the population — had a disability in 2010.
Nevertheless, a big portion of our population does not even know about LTD insurance, let alone use it. A 2014 Bureau of Labor Statistics study reported about a 33% participation rate among private industry workers. I myself had to lecture a few of my friends about its importance.
Considering that 7 in 10 americans hold less than $1000 in savings, it’s fair to say that most of us can’t afford a major loss of income. But in addition to the basic idea of being able to survive financially after a disability, there are a few other reasons that should convince you to consider buying yourself some LTD insurance.
It’s cheaper when you’re young
Like its health and life counterparts, long-term disability insurance rates are affected by age and health. As a result, it’s a good idea to buy it as soon as possible.
Long term financial goals shouldn’t completely disappear due to a disability
Imagine working your tail off for years, making most if not all the right financial decisions, and then suddenly seeing everything disappear due to a long term disability. That would not only be unfair, but it also would discourage us from actually being money savvy. After all, why care when you’re an injury away from having your whole financial world turned upside down?
Your need for financial independence is at an all time high when you can no longer perform professionally. As a result, you want to keep paying off debt and investing so that your physical or mental limitations don’t derail your finances.
What better way to achieve that than to have a constant, guaranteed stream of income long after you stop working?
Some policies cover as much as 80% of the salary. In many cases, that’s essentially a full replacement of income when you consider taxes.
Disability is likelier than you may think
I used to assume disability was reserved to an unlucky few. Was I wrong! As I started actually reading up on it, I realized it was fairly common. According to the Council for Disability Awareness, over 1 in 4 20 year-olds will become disabled before they retire. Clearly, we all need to accept disability as a possibility and plan accordingly.
What to look for
Now that we established that it’s a smart move to get LTD insurance, let’s explore what to look for when shopping around.
I actually got my policy a few months ago, and the first thing you should know is that it’s not like buying a phone charger on Amazon. The whole process can be a hassle. Looking for companies, finding quotes online and actually applying is in my opinion way more difficult than it should be for such an essential product.
But I sucked it up and went all the way through with it, so here are some of the basic terms you should know to help you comparison shop and ultimately make a sound decision.
The Definition of Disability
Your policy’s definition of disability plays a major role in whether you will qualify for benefits. “Own occupation” policies consider you disabled if you are no longer able to perform at your regular job while “Any Occupation” policies only apply if you can’t perform at any job.
In other words, if you don’t see yourself switching careers due to a disability, you should be looking for an Own Occupation plan. On the other end, if you are more open to taking on different roles, you may be able to save some money by opting for an Any Occupation plan.
Waiting (or elimination) Period
This is the amount of time between the beginning of a disability and the first disability insurance payment. It’s similar to a deductible since it basically determines how much money you need to have saved in addition to owning the insurance policy.
Future Purchase Option
This feature allows you to increase your coverage in the future without any medical underwriting. I personally use this rider because my policy only covers about 40% of my income. The rest is under a plan I get through my employer, so if I get laid off or decide to leave, I can easily adjust my coverage.
Some other important things to look at:
- Cost of living adjustment
- Maximum benefit period
- Mandatory Rehabilitation
Do you have LTD insurance? Have you had to use it before? Feel free to share some of your own useful tips.