Long Term Disability Income Insurance
Financial Protection for You & Your Family
A serious illness or injury can harm more than your health-it can
have an impact on your ability to work and meet your family's living
Long-term disability income insurance helps you pay living expenses
while you are unable to work.
It offers paycheck protection providing cash directly to you for
spending on mortgage payments or rent, groceries, utility bills, car
payments, or whatever else you choose. A policy also can pay for
training or other assistance you may need to return to work.
With disability income insurance, you can avoid depleting the savings
you may have accumulated for your children's education or your
This guide outlines the features and costs of individual disability
income insurance and offers tips and a checklist on buying the policy
right for you.
Getting Started -
Determining Your Resources
Before purchasing an individual long-term disability income insurance
policy, evaluate the benefits you may already be eligible to receive
from your employer, the government, or other programs.
Disability benefits from your employer may include workers'
compensation insurance for work-related injuries. For short-term
illness, your employer may provide sick leave, shortterm disability
insurance, or both. For a longer illness, lasting six months or more,
your employer may provide group long-term disability income insurance.
Sick leave and short-term disability coverage from your employer can
range from a few days to as much as a year, depending on your company's
benefits and your length of employment.
Group long-term disability coverage through employers replaces part
of your salary if you are disabled and unable to work. A typical policy
replaces at least half of your salary up to a specific maximum benefit,
such as $5,000 per month. Long-term benefits begin when short-term
disability benefits stop. Benefits from group long-term disability
policies generally continue until either age 65 or your retirement age
under Social Security, or until you are able to return to work. In some
policies, benefits may also be available for a period of time after you
return to work.
Social Security Benefits
Social Security provides long-term disability benefits based on your
salary and the number of years you have worked and contributed to the
Social Security system. However, Social Security replaces only a limited
portion of your salary, and the qualifications to receive benefits are
very strict. To be eligible for Social Security disability benefits, all
of these conditions must be met:
You have been disabled for five full calendar months.
Your disability is expected to last at least 12 months or end in death.
You are unable to be gainfully employed at any occupation, not just your
occupation at the time your disability began.
Other programs besides Social Security aid those who have become
disabled. You may qualify for:
Workers' compensation for work-related injuries or illnesses,
required in all states.
Special disability programs for veterans injured in war, federal and
state government workers, railroad employees, or miners who develop
black lung disease.
State vocational rehabilitation programs.
Automobile insurance benefits for a disability resulting from an auto
Temporary disability programs available in California, New York, New
Jersey, Rhode Island, Hawaii, and Puerto Rico.
Long-term disability income insurance provides financial protection if
you become disabled. It helps pay current bills so that savings
accumulated for your children's education or your retirement can remain
Knowing your eligibility for disability benefits from your employer,
the government, or other programs is an important first step before
deciding whether to purchase disability income coverage. Also take into
account other sources of income that may be available to you: a spouse's
income, short-term emergency savings, investment income, or help from
If the total of these benefits is insufficient to pay your living
expenses if you become disabled, or a disability would affect your
long-term savings plan, consider buying an individual disability income
Features of Disability Income Insurance
Not all individual disability income insurance policies are alike.
Consider these features when comparing policies:
Some policies pay benefits if you are unable to perform the duties of
any occupation for which you are reasonably qualified by training,
experience, and education. Other policies pay benefits if you are unable
to perform the major duties of your own occupation. Many policies
combine these features, providing "own occupation" coverage
for an initial period, such as one or two years, and "any
occupation" coverage after that. Some policies also pay benefits if
you become ill or injured and are unable to earn a specified amount,
such as 80 percent or less, of your income.
The amount of income you would receive when disabled varies by
policy. However, benefits from all sources are usually limited to 70-80
percent of your monthly salary. Policies that pay 50-60 percent of
salary are most common. Most policies do not replace commission or bonus
If you purchase your own policy, your disability benefits typically
are not subject to income taxes. Benefits are taxed, however, if your
employer pays for the disability insurance coverage.
Policies have either level premiums (intended to stay constant over
the life of the policy) or premiums that increase as you age. If you
plan to keep your policy in force long-term, a level premium policy may
be appropriate. If you are uncertain about how long you will need the
insurance, a policy with premiums that
increase with age may be the better choice.
Policies have different waiting periods (called elimination periods)
before you begin receiving benefits. You can lower the premiums you pay
by waiting 90 days, six months, or even longer before starting to
If you go back to work after recovering from a disability and suffer
a relapse within a specific period of time, such as six months, most
policies do not impose a second waiting period.
The length of time that benefits can be received varies by policy.
Some individual policies pay benefits for a specified period of time,
such as two or five years, while others pay benefits until age 65 or
your retirement age under Social Security.
Some policies require total disability before payment begins, while
other policies cover partial disability.
Some policies pay "residual" benefits. These benefits make
up for any loss of income if you are still able to work but your
disability keeps you from performing all of your normal
Under some policies, the insurer pays for job training or other
assistance you may need to return to work, such as modifications to your
Some policies offer cost-of-living adjustments in the amount paid to
the insured as an optional benefit.
Most individual policies are either noncancellable or guaranteed
renewable. With a noncancellable policy, premiums can never be
increased. Under a guaranteed renewable policy, premiums cannot be
raised based on an individual's circumstances, but they can be increased
for an entire class of policyholders. A guaranteed renewable policy may
define how a class is determined for example, all policyholders in a
state who own the same type of policy might constitute one class. Ask
about the circumstances under which premiums can be raised and how
classes are defined.
Most companies review an individual's medical and financial history
and consider any other disability coverage that person has before
issuing a policy. Based on this information, an insurer may offer
limited or modified coverage.
Factors Influencing Cost
A number of factors determine the cost of an individual disability
income policy, including:
Age Younger persons pay less per year for a policy than those
who are older and more likely to become disabled.
Benefit amount Policies that replace more of an individual's
salary are more expensive. A policy that replaces 80 percent of your
salary costs more than one that replaces only 60 percent of your salary.
Benefit period The shorter the benefit period, the less
expensive the policy. For example, a policy with a two-year benefit
period costs less than a policy that pays benefits to age 65, or the
retirement age specified under Social Security.
Current health status Your health status determines whether
you are eligible for standard rates or rates that are higher. A policy
also may exclude from coverage any health conditions that exist before
the policy is issued.
Definition of disability A policy that pays benefits if you
are unable to perform the duties of your own occupation is more
expensive than a policy that pays benefits if you are unable to perform
the duties of any job for which you are reasonably qualified.
Discounts Many companies offer discounts for policies issued
at the same time on more than one person, as well as when an employer
(or association) collects the premiums for individual policies from
employees and pays the insurer.
Extent of disability A policy that pays benefits only if the
policyholder is totally and permanently disabled costs less than a
policy that also pays benefits for a partial or temporary disability.
Gender Women usually pay more than men for an individual
policy because claim costs are higher for women than men. Under a group
policy, however, men and women typically pay the same rate.
Optional benefits For an extra premium, some policies offer
additional benefits, such as cost-of-living increases or the option to
purchase higher benefits in the future.
Smoker/tobacco use Most companies either give a discount to
non-tobacco users or add a surcharge to the premium for tobacco use.
Type of job Expect to pay more for a policy that covers a
high-risk occupation compared to a low-risk line of work.
Tips on Purchasing
Examine how the policy defines a disability. Some policies pay
benefits if you are unable to complete the duties of any occupation for
which you are reasonably qualified by training, experience, and
education. Others pay benefits if you are unable to perform the major
duties of your own occupation. Some policies also pay benefits if you
become ill or injured and are unable to earn a specified percentage of
Ask for outlines of coverage so you can compare the features of
several policies. Make sure you fully understand any policy you are
considering-a policy that does not provide the protection you need is
not a good buy. Features to look for in a policy include:
- Definition of disability (own occupation or any occupation;
- Benefit amount
- Elimination period (waiting period before benefits begin)
- Length of benefit period
- Benefits for partial disability
- Replacement of lost income
- Return-to-work programs
- Recurrent disability (relapse provision)
- Cost-of-living adjustments or the right to purchase additional
- Mental health/substance abuse provisions
- Noncancellable or guaranteed renewable
- Exclusions or other coverage limitations
Check that the company and agent are licensed in your state. If you
have concerns, contact your state insurance department. An online
resource for contact information is www.naic.org, the Web site for the
National Association of Insurance Commissioners (NAIC), an organization
of insurance regulators from each state.
Look for a company that is reputable and financially strong. Several
services rate the financial strength of companies, and rating
information can be obtained from your agent and public or business
Rating agencies include:
A.M. Best Company
or (908) 439-2200
Standard & Poor's Insurance Rating Services
Duff & Phelps Inc.
Moody's Investor Services
Ratings are free from these Web sites, but a charge may be assessed
for ratings obtained by phone.
Fill out your application accurately. Always answer questions about
your medical history and health completely and truthfully. If you are
dishonest, the company may later be able to cancel your coverage.
Read your policy carefully to make sure it offers the coverage you
need. For instance, some policies pay benefits only if you are disabled
due to an accident, not an illness.
Always check the date that the insurance becomes effective.
When you purchase a policy, make your check payable to the insurance
company, not the agent, and get a receipt.
After purchasing an insurance policy, you may have a
"free-look" period (usually 10 days after you receive the
policy) when you can change your mind. During that time, review your
policy. If you decide not to keep it, the company will cancel the policy
and give you a full refund.
If you have a complaint about your insurance agent or company,
contact the customer service division of your insurance company. If you
are still dissatisfied, contact your state insurance department.
If you are in the market for long-term disability income insurance,
shop around to compare costs. Disability income insurance is sold
individually through insurance agents, or through group policies which
may be available from your employer or professional organizations.
Before purchasing long-term disability income insurance, find out if you
have coverage through your employer. Some employers pay a percentage of
your salarygenerally 50 to 60 percent-if you become disabled and can't
work for six months or more. Also consider other sources of income, such
as your spouse's income, and whether the sum would be enough to pay your
family's bills. If so, you may not need individual long-term disability
An individual policy provides protection for as long as you continue
to pay the premium. Group coverage lasts only as long as you are
employed or a member of the group.
If disability income insurance is the protection you need, shop
around and compare policy features before making a purchase.
Decide which features are most important to you-the cost of the
policy will vary with the features you select.
Consumer Federation Of America
1424 16th Street, N.W., Suite 604
Washington, DC 20036
American Council of Life Insurers
Financial Security For Life
1001 Pennsylvania Avenue, N. W.
Washington, DC 20004-2599