The Basics of Long Term Disability Insurance

Many people don't realize the potential danger of becoming disabled. According to the U.S. Census Bureau, you have a one in five chance of becoming disabled. A 1997 study released by the Census Bureau reveals that more than 152 million people between the ages of 21 and 64 — the prime working ages for most Americans — have some form of disability.

• "Disabilities are lasting longer for female workers, but the increases have not been as pronounced when compared with the male population. At age 45, women are almost twice as likely to suffer a long-term disability than men." Source: Life and Health Insurance Foundation for Education (LIFE), New Study Sheds Light on Americans' Real Risk of Disability, Press Release, May 2007.
• "Almost three in ten of today's 20-year-olds will become disabled before reaching age 67." Source: Social Security Administration, Fact Sheet, 2007
• "The probability of a white-collar worker becoming disabled for 90 days or longer between the ages of 35 and 65 is 27% for men and 31% for women, compared to 29% for men and 34% for women in the 1970s and 1980s. However, the duration of disabilities has increased substantially. A 35-yearold, white-collar male who suffers a disability lasting 90 days or longer will be out of work for an average of about six years, compared to slightly less than four years in the 1970s and 1980s." Source: Life and Health Insurance Foundation for Education (LIFE), New Study Sheds Light on Americans' Real Risk of Disability, Press Release, May 2007

Becoming disabled can have devastating financial implications by stripping you of your ability to make a living. While some people can get by without working for a few months by tapping into their savings, few people can afford to stop working altogether for an extended period of time.

That's where long term disability (LTD) insurance can help you. LTD policies provide you with income for a long period of time, with several benefits options available. Most people who have LTD insurance get it through their employers, although you can buy individual LTD insurance on your own, which is usually known as individual disability, or “DI”. DI is much more costly than group LTD, and can be difficult to obtain due to rigid underwriting, however it can also contain many features not included in group LTD, most notably, guaranteed renewable rates and stronger definitions in some areas.

Long-term disability in a nutshell

Group long term disability insurance picks up where short-term disability insurance leaves off. Once your short-term disability benefits expire (generally after three to six months), the long term disability policy pays you a percentage of your salary, usually 50, 60, or 66 2/3 percent if you become disabled. You then receive benefits for the length of your benefit period. The average cost for an individual to be covered for group long term disability insurance in 2006 was $232 according to John Hewitt & Associates, a disability research company based in Portland, Maine.

Group Long Term Disability Insurance

If you pay your own premiums and do so with after-tax dollars, your disability benefits will be tax-free. If your employer pays for the policy, most likely with pre-tax dollars, your disability benefits will be taxable.

Most disability insurers will work with employers to try to get you back to work as soon as possible. While disability insurers want to see people healthy, rehabilitated, and back to work, they also save significant dollars if a claimant quickly returns to work. "Once you hit the LTD timeframe, you begin to manage the claim, in addition to paying it," says Eric Reisenwitz, senior vice president of group underwriting and disability claim operations for CIGNA Corp.

You'll most likely find your disability insurer "managing the claim" if you are "partially disabled" - meaning you can still work, but in a job that pays substantially less. LTD will pay you additional money if you decide to take a lower paying salary, as outlined in the following example.

Let's say you worked in a warehouse lifting crates making $40,000 annually. You then hurt your back at home and are forced to take a desk job that pays $20,000 annually. If your LTD policy was paying you 60 percent of your original $40,000 salary, it will now pay you 60 percent of what you are making in the lesser job. So now instead of staying at home and collecting $24,000 from your LTD policy only, you work at the lower paying job and make $32,000 (in addition to the $20,000 salary, you also get $12,000 in disability benefits, which is 60 percent of $20,000).

"They get their income from a new job, and they still get some kind of benefit," says Tracie Foster, LTD product director at Hartford Life. "We want them to be better off working than not working."

Monica Burnett, national accounts disability director for MetLife, says that some insurers will also reimburse the employee for child care expenses if the employee's spouse must go back to work as a result of the disability. "A lot of times, that's a huge factor in whether or not a person can return to work," she says. Drew King, vice president of marketing at JHA Associates, says that some disability insurers give employers an incentive to have workers return to work on a part-time basis. He says it's common for insurers to give employers a premium reduction on the group policy if they allow a partially disabled person to come back to work on a part time basis.

If you become disabled and begin receiving benefits, you will no longer have to pay premiums. Also, if you pay your premiums with after-tax dollars, your disability payments will not be treated as taxable income. If your employer pays for your group disability insurance with pre-tax dollars, your benefits will be treated as taxable income.

Figures are hypothetical and for illustrative purposes only.

Mark Jacobsohn, RHU, REBC
President
mark@relayerbenefits.com

“Endorsed broker with the
Maine Medical Association for Long Term Disability”

“Member of the JHA
Broker Advisory Board”