Long-term disability insurance: Is your employer coverage enough?

Your ability to earn an income is often your greatest financial asset. But what happens if an unexpected injury or illness keeps you from working? Without a stable income, even the best-laid plans—education savings, mortgage payments, retirement goals—can be jeopardized.

Long-term disability insurance provides a crucial financial safety net, replacing a portion of your income if you can't work for an extended period. This guide will walk you through what long-term disability insurance is, who needs it, and how to choose the right coverage for your situation.

What is long-term disability insurance?

Long-term disability insurance is designed to protect you financially if you're unable to work for an extended time due to an accident, injury, or illness. It helps you cover living expenses and maintain your lifestyle while you recover.

Still, many people forego this type of coverage, especially if they are young and healthy. But consider this:

• Just under one in four adults will become disabled before reaching retirement age. ¹ It’s often assumed that disabilities result from major accidents, but common issues like musculoskeletal injuries, heart problems, mental health issues, and cancer can also prevent you from working.
• The average long-term disability claim lasts nearly three years. ¹ Yet nearly 40% of American adults can’t pay for an unexpected $400 expense, making long-term disability insurance a critical safety net. ¹

Types of disability insurance

Understanding the different types of disability insurance can help you determine the right level of protection for your needs.

• Short-term disability insurance. As the name suggests, this covers you in the event of a short-term injury or illness, typically three to six months. It’s meant to bridge the gap until you can return to work or until long-term benefits begin. This type of coverage is required by employers in some states.
• Long-term disability insurance. This coverage is for periods lasting several years (e.g., two, five, or ten) or even until you reach retirement age. Many mid- or large-size employers offer long-term disability coverage via a group plan like health insurance, but you can get supplemental coverage through an individual plan.
• Social Security Disability Insurance (SSDI). This government-offered insurance is available only to qualified individuals who meet a strict definition of disability and adhere to stringent requirements.

Here is a comparison of the different plan types:

Note: These are averages, and figures vary based on the specifics of each policy.

Is employer-sponsored long-term disability insurance enough?

Many companies offer long-term disability insurance as part of their employee benefits package. While this is a valuable perk, it's important to understand its limitations.

Just 30% of U.S. employees in private industry have access to employer-sponsored disability insurance. ² If you do have access, keep the following in mind:

• Limited income replacement. Employer-sponsored policies typically replace only about 60% of your income. ³
• Taxable benefits. If your coverage is paid with pre-tax dollars, any benefits you receive will be taxed, further reducing your payout.
• Fixed elimination period. These plans have a set waiting period, ranging from 30 days to two years, before you can start collecting benefits. ⁴ You typically cannot negotiate this period. This means that you could end up having to wait longer to begin receiving a disability payout.

Individual long-term disability insurance

An individual long-term disability insurance policy can supplement employer coverage or serve as your primary policy if your job doesn't offer one. These plans offer greater flexibility and more comprehensive protection.

• Higher coverage. Individual disability policies may cover up to 80% of your income, providing a more substantial financial cushion. ³
• Tax-free benefits. Because you pay for individual coverage with after-tax dollars, the benefits you receive are not taxed.
• Portability. Your policy is not tied to your employer. It stays with you even if you change jobs, as long as you continue paying the premiums.
• Customization. Individual disability plans are more flexible. You can choose a shorter elimination period or opt for an "own-occupation" policy. This type of policy is especially beneficial for those in highly specialized professions (medicine, law, etc.), as it pays full benefits if you're unable to perform your specific job, even if you could work in another role.

How much does long-term disability insurance cost?

You can generally expect to pay between 1% and 3% of your annual salary for an individual long-term disability policy. However, several factors influence your premium:

• Occupation. The riskier your job is, the more expensive your premium.
• Age. Purchasing a policy when you're younger typically results in lower costs.
• Elimination period. The shorter the waiting period before payout, the higher the premium.
• Benefit amount. A higher income replacement percentage will increase the premium.
• Benefit duration. The longer the plan's benefit period, the more it will cost.

Frequently asked questions about long-term disability insurance

What conditions qualify for long-term disability?

The definition of disability varies by policy. In general, disability insurance covers illnesses or injuries that prevent you from working for an extended period, such as chronic pain, cancer, heart disease, and mental health issues.

An individual policy allows for more customization, including an "own-occupation" definition of disability.

How long does long-term disability last?

The benefit period depends on your policy. The average length is 2-10 years, but some policies may provide benefits until you reach retirement age (e.g., 65 or 67). A longer benefit period will result in a higher premium.

What is the elimination period of a disability insurance policy?

The elimination period is the time you must wait after an injury or illness before you can receive benefits. With an individual policy, you can often choose this period, whereas employer-sponsored plans typically have a fixed period ranging from 30 days to two years.

Can I get disability insurance if I’m self-employed?

Yes, if you’re self-employed or a small business owner, certain disability insurance policies may also protect your business and reimburse any covered expenses incurred during your disability. This can help you avoid depleting your emergency fund or retirement savings if something happens.

Protect your financial future

Whether you're covered by an employer's plan or not, an individual long-term disability insurance policy may provide the security you need if the unexpected happens. It’s a vital component of a resilient financial plan.

Consider talking with a financial professional to discuss how long-term disability insurance can help protect you in case of injury or illness.

Learn more about insurance options from U.S. Bancorp Investments.