Many people don’t bother with long-term disability insurance. They may think that being young, working behind a desk all day, or not taking a lot of personal risks (like skydiving or axe-throwing) means they don’t have to worry.
But the Social Security Administration estimates that one in four people who are 20 years old today will become disabled before they reach retirement. And in a recent survey, the majority of Americans said they don’t have a rainy day fund that could cover their living expenses for three months – and nearly half said they wouldn’t have the money to cover a $400 emergency expense.
So making sure your employees understand their long-term disability benefits might be more important than you think. It’s one of those benefits that ends up towards the bottom of your list during open enrollment presentations, but it’s worth spending a little extra time on—because chances are, some of your employees will use it in the coming year.
Share these easy long-term disability insurance definitions with your employees to help them make more informed decisions, and protect their income if an emergency comes up.
In this article:
What is long-term disability insurance?
Long-term disability insurance is a safety net for those who become disabled and cannot work in their previous job for several months (or more).
Typically, long-term disability insurance pays about 60% of your income while you’re unable to work, though policies can range from 50% to 80%. Many long-term insurance policies will replace the income that you lose if you’re forced to take a lower-paying job as a result of your injury or illness.
There are two ways to get long-term disability coverage:
- Provided through your employer
- Covers anyone, regardless of pre-existing conditions
- Do not need to prove your income when you apply
- Lower premiums
- Lower coverage
- Does not carry over if you switch employers
- Higher coverage
- Carries over if you switch employers
- Higher premiums (1-3% of annual income)
- Requires a medical exam and phone interview
- Pre-existing conditions may not be covered
Are long-term disability benefits taxable?
Whether you pay taxes on your long-term disability benefits depends on where you’re covered.
If you pay your own premiums, using after-tax dollars, then your benefits are not taxed. If you’re on an employer-sponsored plan and you pay your premiums with pre-tax dollars, then your benefits are taxed. If your employer pays a portion of the premium, then you are only taxed on the portion that your employer has paid for.
What’s the difference between long-term and short-term disability insurance?
Short-term disability insurance is just that. The average policy lasts three to six months, though some plans can last up to two years. On the other hand, long-term disability insurance is meant to last much longer – a minimum of two years, or as long as it takes for you to reach retirement age.
The other key difference is the elimination period. This is how long it takes for your disability insurance to kick in from the time that you become disabled. For short-term disability insurance, it typically only takes a week or two to start getting paid. With long-term disability insurance, though, the elimination period is a minimum of 30 days, though the standard period is 60 or 90 days. The idea is that long-term disability benefits will kick in once short-term disability insurance has run out.
What are the types of long-term disability benefits?
Most policies define four ways in which you can claim long-term disability:
- Own occupation: Benefits are payable if you’re unable to perform your regular job or a similar job. You may even be eligible if you’re able to work at another job that’s not the same as your previous one.
- Any occupation: Benefits are payable if you’re unable to perform any job that you’re qualified for based on your education, training, or experience. This is the strictest definition of disability, and policies that provide this coverage tend to have the lowest premiums.
- Modified own occupation: Allows you to receive benefits even if you are deemed capable of working, but choose not to.
- Transitional own occupation: Limits your benefits based on the difference between your total benefit amount and your post-disability income.
Own occupation and any occupation are the most common types of long-term disability policies.
What types of conditions qualify for long-term disability?
Long-term disability applies to medical conditions that meet the Social Security Act definition of disability. In a nutshell, the law defines disability as a physical or mental condition that’s expected to last for at least 12 months.
The top five causes of long-term disability account for nearly two-thirds of all claims:
1. Musculoskeletal. More than 25% of all long-term disability claims are the result of muscle, back, and joint disorders. These could be the result of sports-related issues, injuries in everyday life, arthritis, or other chronic pain.
2. Cancer. The mortality rate for cancer patients has been dropping since 1991. This is great news, but it means that more people experience long-term disability as a result of cancer treatment and recovery.
3. Injury. Broken bones, torn ligaments, accidents, and complications from surgery make up about 10% of long-term disability claims.
4. Cardiovascular. A range of genetic and lifestyle-related heart conditions cause nearly 10% of long-term disability claims. And many can come on suddenly, such as a heart attack.
5. Mental health. The World Health Organization has said that depression is the leading cause of disability around the world. In the United States, depression, anxiety, and other mental health conditions account for nearly 10% of long-term disability claims.
Other causes of long-term disability include infectious disease, respiratory conditions, and digestive disorders.
There are also conditions that some policies may not cover, like unmanaged Type 2 diabetes, obesity, or alcohol- or drug-related illnesses, including injuries as a result of driving while intoxicated.
If you’re planning to have a baby, it’s important to note that long-term disability policies cover complications that arise during pregnancy, but do not cover pregnancy as a whole or the process of giving birth. And remember: long-term disability coverage typically doesn’t kick in until six months in. So if a pregnancy complication clears up before the end of your short-term disability coverage, then you won’t be eligible for long-term disability benefits.
What can I add to my long-term disability policy?
There are four common long-term disability insurance riders (AKA additional benefits) that cover more than what’s offered in a basic insurance policy.
- An enhanced partial disability rider makes up for a portion of your salary, in the event you’re only able to work part-time due to a disability.
- A cost-of-living rider accounts for inflation by increasing your disability payout by a minimum of 3% every year.
- A future increase option rider means that you can get additional long-term coverage without having to go through the application process a second time. This rider is valuable in scenarios like reaching a certain age or getting a raise.
- A catastrophic disability rider will pay for long-term care if you suffer a loss of speech, hearing, or sight, if you lose the use of your hands or feet, or if you’re unable to complete daily activities like bathing, dressing, or eating without assistance.
What can impact the cost of long-term disability insurance?
Here are a few factors that can impact the cost of your long-term disability insurance premiums:
Occupation and earnings. Insurance companies group jobs into categories based on how hazardous they are, the usual types of disability claims associated with that profession, and the ability for someone to perform their job if they’re disabled. Plus, the more you earn, the more there is to insure.
Age and gender. Women can expect to pay higher premiums than men for long-term disability insurance. There are two reasons: They are more likely to suffer disabilities that impact their careers, such as breast cancer and autoimmune diseases, and claims tend to last longer (in part because women have a longer life expectancy than men). And just like life insurance, premiums only go up the older you get.
Overall health. Coverage will cost less if you don’t have any pre-existing conditions, don’t smoke or drink heavily, or don’t have a family history of medical conditions that lead to long-term disability.
Benefit period and elimination period. A long-term disability policy that provides coverage all the way until retirement age will have higher premiums that a policy that provides benefits for 10, five, or two years. In addition, the shorter the elimination period – that is, the sooner that benefits are paid out – the higher your premium.
Addition of riders. Obtaining additional coverage through a rider will increase your premiums, too.
Help employees find the right long-term disability policy
The sooner employees sign up for long-term disability insurance, the sooner they gain the peace of mind knowing that they can support their families even in the event of an illness or injury. But that doesn’t mean employees should rush the process. There’s lots to consider, and even the most seasoned HR pros may not have all the answers.
ALEX can help by providing employees 24/7 access to personalized guidance and other resources to help them make the best benefits decisions, giving them – and you – time to focus on the things that matter.