Financial Planning for Geeks

Lions and Tigers and Accidents, Oh My!

- Insurance

Yes, it’s time for an update on what is probably the sexiest topic I have ever addressed: long-term disability (LTD) insurance.

A pencil drawing of a lion from "Wild Animals and Birds"
A lion, oh my!

But seriously, this is SO important to your financial life plan and I find that most people aren’t even aware of it. It’s been almost two years since I wrote about it, and it’s about time I refreshed everyone’s memories. I’ve also learned one or two new things about this type of coverage since my last foray into the subject.

Here’s a quick review for you: a long-term disability is an illness or injury which keeps you out of work for more than 90 days. Long-term disability insurance replaces some of your income if you have an illness or injury which lasts longer than 90 days. Once you hit that 91st day and you’ve submitted a successful claim, the insurer will start paying you the agreed-upon monthly coverage amount. They will continue until you go back to work or reach the end of the maximum coverage period. You can use the money for anything you like: mortgage, rent, food, gas, healthcare expenses, beer, or troll dolls.

During the first 90 days of a disability, most full-time employees still receive 100% of their salaries from their employers under short-term disability coverage. After the 90 days are up, typical coverage goes down to 60% (usually salary only, and not including any bonuses, stock options, or miscellaneous income). This 60% is also taxable for the employee, so most people will net out earning about 50% of their salary if they have a disability lasting longer than 90 days. And hey, not everyone gets this level of coverage, or any at all. It’s important to check with your employer about the details of your organization’s coverage.

If you can live on 50% of your salary (or whatever your coverage level is) for the foreseeable future, kudos to you because that’s uncommon. If you can’t, you need an individual supplemental long-term disability insurance policy, which is basically a long-winded way of referring to a policy which fills the gap. An insurance company will never fill the gap completely because they want you to stay motivated to get back to work, but they will probably offer you enough supplemental insurance to cover about 85% of your total earnings (including bonuses and so forth). Please call your favorite insurance broker to get this done.

“But Penny,” you interject, “I’m self-employed. What kind of coverage do I have”? Well, my dear, unless you have purchased your own policy, you DON’T have any long-term disability coverage (except maybe Social Security and/or Workers’ Compensation; see the gotchas below). You don’t have short-term disability coverage, either. That’s right, none at all. Bubkes. I’m sorry about that, but it’s important you’re aware of the issue. Self-employed people can buy an individual policy OR a group policy if they are running a large enough business, but they do have to go out and get these policies themselves. Please call your favorite insurance broker.

Your broker will want to know which policy riders you want to buy. Please see my discussion of riders here, since the riders don’t tend to change much over time. Just note that each insurer may have slightly different names for these riders, and insurers vary in terms of which riders they include in the base policy and which cost extra. If you have a list of the ones you want, your broker can help you get apples-to-apples quotes for comparison. Make sure they show you where each rider is in the quote and how much it costs, if anything.

You will also want to take a look at the total monthly coverage each insurer is offering you, once you’re sure you have apples-to-apples quotes. This is how much the insurance company will pay you every month once you’ve passed the 90-day mark in your disability. I would always advise accepting the offer with highest total monthly coverage, because that little bit extra each month is so worth a few extra dollars in premium every year. Please also make sure you know the maximum coverage period for your policy; e.g., to your age 65, 5 years, or some other term. Get the longest one you can afford.

And here are a few gotchas and wrinkles to understand about long-term disability insurance, so you know what to expect:

1.       If you’ve seen a chiropractor for any reason, your supplemental long-term disability coverage will typically exclude your back from coverage. This means they won’t pay your benefit if a back problem keeps you out of work. It doesn’t seem to matter whether you just go for adjustments and have never had a documented back problem. They will still exclude your back from coverage.

One exception would be a back injury. If you break your back in an accident you would be covered, but if you have severe back pain you would NOT be covered. And don’t even think about keeping your chiropractor visits a secret, because that’s fraud. All sorts of terrible things can happen to you if you lie on an insurance application, including being forced to pay back any benefits you’ve received.

2.       If you’ve taken prescription sleeping pills or medications related to mental health in the recent past, or if you’ve had treatment for sleeplessness, anxiety, depression, or similar issues, long-term disability insurers will typically exclude all mental health claims from coverage. If this happens to you, be sure to find out if the exclusion is permanent. If it’s not, find out how long the exclusion lasts and ask for a review after that period if you’ve had no further issues. They may consider removing the exclusion and then you’re covered.

3.       This is a new one on me: it seems insurers have been paying a lot of long-term mental health and substance abuse claims and are looking for ways to keep their profits intact. They used to include coverage for any length of mental health and substance abuse disability, and now the default is to cover a maximum of 24 months (this may vary by insurer, so please check).

Some people will have no choice, and their maximum length of coverage for these issues will be 24 months. People in certain classes of employment (insurers group occupations into classes for the purposes of pricing policies) may have the option to pay a higher premium for the maximum length of coverage under the policy. So if you have coverage until you’re 65, you would get coverage for these issues until you’re 65; if you have 5 years of coverage, you would get 5 years of coverage for these issues. It will just cost you extra.

4.       This is not health insurance. There are no rules against using pre-existing conditions to decline you or charge you more in this realm. If your health is poor or even not optimal, the insurer can decide not to insure you, or they can charge you more. Again, I’m sorry about that. Just be aware before you go out there looking for policies. It’s still very important to have this coverage, so if there is any way you can afford it, I do highly recommend it.

5.       This is not inexpensive insurance. It’s not like life insurance, where a young, healthy person can spend a few hundred dollars a year and get $1M in coverage. It’s going to be in the thousands of dollars a year, not the hundreds. But please believe me when I say you need it, especially if you’re the only one in your household who’s working! At least buy what you can afford. Generally the annual premium is less than ONE monthly payment the insurer will give you if you get disabled. And think about all it’s covering; add up all the monthly benefit payments you would get if you have a long or permanent disability, and you’ll see that it’s a lot of money over time.

6.       This is NOT the same as Accidental Death and Dismemberment Insurance (AD&D), which is offered very inexpensively by many employers. AD&D coverage only kicks in if you become sick or injured or get killed in a few very specific ways. You need coverage for all the myriad ways in which people can get sick or injured. If you’re covered for cancer and you have a stroke, you’re out of luck with AD&D.

7.       This is NOT the same as long-term care insurance (LTC). You probably need both LTC and LTD coverage. The difference is that LTC insurance pays for the cost of staying in a nursing home, memory care, or assisted living facility, or receiving adult day care or in-home care. These expenses aren’t covered by your health insurance. Health insurance only pays for necessary medical care, rather than room and board or help getting dressed, eating, etc.

LTD pays your living expenses while you can’t work; they just send you the agreed-upon amount of money every month. You could certainly use your LTD payments to pay for long-term care services if you need them and don’t have LTC insurance. However, you would soon run out of LTD money, especially if you are in assisted living while you’re still paying for your family to live at home. And you will only be keeping that LTD policy until you stop working; you can’t get insurance coverage for an income unless you’re still working for an income. LTC coverage persists as long as you pay the agreed-upon premium, and you do need to keep it even after you stop working because your likelihood of needing it increases with age.

8.       Social Security may NOT have your back. It can be difficult to qualify for Social Security Disability payments, and the process can also take much longer than the LTD claims process. Also, keep in mind that the maximum monthly benefit you can receive from Social Security as of 2021 is $3,148, while the average hovers around $1,280 a month. I’m not sure where you live, but even the maximum wouldn’t put much of a dent in Seattle-area household expenses for quite a few people.

9.       Workers’ Compensation probably does NOT have your back. Workers’ Compensation rules vary by state, but most states require companies with employees to have workers’ compensation insurance. The employer pays the cost for the insurance, and both the employer and employee can receive benefits when a claim is filed. The typical state will pay 66% of an employee’s income while they are out of work, and there may be some healthcare benefits included as well. On the bright side, the benefits are generally not taxable to the employee AND income like gifts and bonuses will typically be included. But still, ask yourself if your household can get by on 2/3 of your current income.

The huge gotcha with Workers’ Compensation coverage is that your illness or injury has to be work-related, you have to have been working during the time of the injury or start of the illness, and you have to be able to prove it. Another big gotcha is that Workers’ Compensation doesn’t cover slips and falls, car accidents, carpal tunnel, back injuries from repeated movements, or injuries to the lungs from breathing toxic substances. So pretty much all of the most likely workplace injuries and illnesses aren’t covered. It doesn’t cover illnesses or injuries outside of work at all. Do you want to bet on your illness or injury being covered under such specific requirements?

10.       Lest you think yourself invincible, my darling, here are some stats to hopefully scare the stuffing out of you and convince you to get this coverage (from the Council for Disability Awareness):

    a.       Over half of working households don’t have any long-term disability insurance at all (54.3%, to be exact).

    b.       Only 48% of US adults would be able to cover three months of living expenses if they couldn’t work. Honestly, I’m surprised it’s that many. And anyway, three months isn’t long enough if you have a longer disability.

    c.       More than 25% of 20-year-olds will be out of work for at least a year because of a disabling illness or injury before they reach their retirement age. This is for you, my young and healthy readers. Which one will it be? You, or one of your three friends?

    d.       26% of consumer bankruptcies are due to medical bills, and 15% are due to the illness or injury of oneself or a family member. I hope it’s clear by now that long-term disability coverage can help with both.

As you can see, individual long-term disability coverage is complicated AND critical for your financial life plan. Please be sure you get the detailed, apples-to-apples competitive quotes I suggested above and really pick through them to make sure you get what you need. Once you’ve applied and been approved, make sure you read the policy documents and any addendums to make sure they are correct. And if you’re eligible to pay a little more every year to increase your coverage to match raises and inflation, DO IT. The younger you are, the more important it is to keep your benefit level with your income by taking these coverage increases.

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Penny Farthing

I, Penny Farthing (non-wizarding name Kerry Read ), actually have a day job in the world of finance. This blog came into being because of my deep and abiding love for geeks and Personal Finance.