By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
Long-term disability (LTD) coverage is an often-overlooked aspect of personal financial planning. LTD insurance provides monthly income to people who become disabled for (usually) 90 days or more. Many employers provide LTD coverage for their employees.
When we inquire with clients for the first time, we estimate that 80% have no idea how much LTD they have through their employer. Disability simply isn’t thought of or thought through much.
Of those employees that do know how much LTD insurance they have, most aren’t sure how this insurance works, or whether they have enough coverage to maintain financial security while disabled.
Why do workers need access to LTD? The Council for Disability Awareness has created a web-based tool to give you an idea of the likelihood of becoming disabled during your working career.
Risk of disability
According to this calculator, a typical non-smoking, generally healthy, 35-year-old U.S. office employee, has a 24% chance of becoming disabled for three months or longer during her working career. If that person becomes disabled, there is a 38% probability that the disability will last for five years or longer.
If you smoke or are overweight, work in a hazardous job or are otherwise unhealthy, the chances of you becoming disabled during your working career rise.
The Center for Disease Control and Prevention (CDC) reports that about 53 million adults in the U.S. live with a disability. The 2015 Disability Statistics Annual Report noted that about one-third of the disabled people in the U.S. were employed. On average, these disabled people earned $21,232 per year vs. the $31,324 average salary of a non-disabled person (about one-third less). This difference in income levels put 28.1% of disabled people into the poverty category in 2014 vs. the 13.3% of non-disabled workers who were in the poverty category.
Most of these people did not have access to LTD insurance which could – at least partially – help replace some of the income that they lost.
LTD insurance policies have many different features that affect both the cost of this insurance and the amount of benefits that are paid. Some of these include:
- The amount of the monthly payment that you will receive if hurt.
- When the payments will start and how long they will be paid.
- Whether the disability payments will be paid if you can do any occupation (like working at a car wash) versus the occupation you had before you were injured (like working as an engineer).
- Whether the disability payments will increase at the level of inflation over future periods.
Since most individuals who work for small businesses don’t have access to LTD as part of their benefits package, we recommend that these people try to obtain this insurance either through a group that they belong to or purchase it directly from insurance carriers who will provide coverage based on your earnings history, the type of work you do and the amount of monthly coverage you are requesting.
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