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

Long-term disability (LTD) insurance can replace part of your income if an illness or injury keeps you from working for a long time. Many people can get LTD coverage through work, but it may not cover as much as you’d expect, and it usually doesn’t follow you if you change jobs.

An individual policy can help address those gaps with additional coverage and greater flexibility. Here’s what to know about long-term disability insurance, how employer plans typically work, and when an individual policy might help fill gaps.

What is long-term disability insurance?

Long-term disability insurance helps protect you financially if you can’t work for an extended time because of an accident, injury, or illness. It can help you keep up with everyday expenses while you recover.

Why long-term disability coverage matters

It’s easy to skip this coverage when you feel healthy. A few realities are worth keeping in mind:

• A long absence from work is more common than many people think: Just under one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before reaching normal retirement age. ¹
• Disability claims can come from many causes: Common reasons include muscle and joint conditions, cancer, fractures and sprains, mental health conditions, and events like a heart attack or stroke. ¹
• Many households don’t have extra cash for a disruption: Nearly four in 10 U.S. adults say they couldn’t cover a $400 unexpected expense without borrowing or carrying a credit card balance. ¹

What are the types of disability insurance?

The main types of disability insurance are short-term disability, long-term disability, and Social Security disability insurance (SSDI). They differ in how long benefits last, how soon benefits may start, and how each defines “disability.”

• Short-term disability insurance: Covers shorter time away from work, often three to six months. It can help bridge the gap until you return to work or long-term benefits begin. Some states require employers to offer this coverage.
• Long-term disability insurance: May last for several years (such as two, five, or 10 years) or up to retirement age, depending on the policy. Some employers offer it through a group plan, and some people add supplemental coverage through an individual plan.
• Social Security Disability Insurance (SSDI): A federal program for people who meet a strict definition of disability and other requirements.

Note: These are general ranges. Actual benefits vary by policy and your situation.

How does long-term disability insurance work?

Long-term disability insurance may pay you a portion of your income after you file a claim, meet your policy's requirements, and complete any waiting period.

Although requirements vary by policy, LTD coverage often works like this:

• File a claim: You submit information, including medical documentation, that shows you can’t work based on the policy’s terms.
• Elimination period (waiting period): The time between when your disability begins and when benefits can start. A longer elimination period often lowers your premium.
• Benefit period: How long the policy can pay benefits once your claim is approved. This can be a set number of years or up to retirement age, depending on the policy.
• Benefit amount: Many policies replace a percentage of your income, often in the 60% to 80% range.

Is employer-sponsored long-term disability insurance enough?

Employer-sponsored long-term disability insurance can be a valuable benefit. Still, the details vary widely by plan, and coverage limits can create gaps.

If you have coverage through work, review your plan for common issues like these:

• Income replacement may be limited: Many employer plans replace up to about 60% of income.
• Monthly benefits may be capped: Even if a plan replaces a percentage of income, a monthly maximum may reduce the amount a higher earner receives.
• Taxes may reduce what you take home: If premiums are paid with pre-tax dollars, benefits you receive are typically taxable.
• The elimination period may be fixed: Employer plans usually set the waiting period for you.
• Coverage may not be portable: If you change jobs or leave your employer, your coverage may end.
• The definition of disability matters: Some plans may pay only if you can’t perform any suitable occupation, while others may use a different standard.

Voluntary and buy-up long-term disability insurance

If the basic employer plan doesn’t feel like enough, your employer may offer voluntary or buy-up coverage. This lets you purchase additional coverage beyond the base plan.

Common features may include:

• You may pay premiums with after-tax dollars.
• It may require limited medical underwriting, depending on the plan.
• Group pricing may help keep costs lower than an individual policy.

What is individual long-term disability insurance?

An individual long-term disability policy can supplement employer coverage. It can also serve as your primary policy if your job doesn't offer LTD coverage.

Individual policies often offer more choice in how benefits work, such as:

• Portability: The policy isn’t tied to your employer. It stays with you even if you change jobs, as long as you keep paying the premiums.
• More customization: You may be able to choose a shorter elimination period or an own-occupation definition. With own-occupation coverage, you may still receive benefits if you can’t do your specific job, even if you could work in a different role. This can matter in highly specialized professions, such as medicine.
• Higher coverage options: Some policies may cover up to 80% of income, depending on underwriting and plan limits. ²
• Different tax treatment: If you pay premiums with after-tax dollars, benefits are generally not taxed. (Tax treatment depends on your situation.)

How much long-term disability insurance do I need?

The right amount depends on your budget, existing coverage, and how much your household relies on your income. A practical starting point is enough coverage to handle essential expenses if your paycheck stopped for an extended period..

As you evaluate your coverage, think about:

• Your monthly living expenses
• Any employer-sponsored disability benefits
• Other household income sources
• Emergency savings you could rely on
• How long you'd need to wait before benefits begin
• Whether your employer plan has a monthly benefit limit
• How taxes could affect the amount you ultimately receive

You don’t always need to replace every dollar of income. Focus on staying financially stable and covering the expenses that matter most to your household.

How much does long-term disability insurance cost?

Many people pay about 1% to 3% of their annual salary for an individual long-term disability policy. ³ Your cost depends on factors like:

• Occupation: The riskier your job is, the more expensive your premium.
• Age: Purchasing a policy when you're younger can help lower premiums.
• Elimination period: Shorter waiting periods usually cost more.
• Benefit amount: More coverage usually means a higher premium.
• Benefit duration: The longer the plan's benefit period, the more it will cost.

Frequently asked questions

What conditions qualify for long-term disability?

The definition of disability varies by policy. In general, long-term disability coverage applies when an illness or injury keeps you from working for an extended time and meets the policy’s definition of disability. Some policies also address mental health conditions, chronic pain, cancer, and heart disease, but coverage details vary.

How long does long-term disability last?

It depends on the benefit period you choose (or your employer sets). Some policies pay for two to 10 years, while others can pay up to retirement age (such as 65 or 67).

What is the elimination period?

The elimination period is the time you must wait after a covered disability begins before benefits can start. With an individual policy, you may be able to choose it. Employer plans often set it for you.

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

Yes. Some policies are designed for self-employed people and small business owners. Certain coverage may also help reimburse eligible business expenses during a disability, depending on the policy. This can help you avoid depleting your emergency fund or retirement savings if something happens.

How much does long-term disability pay?

Many policies replace about 60% to 80% of income. Employer plans often replace less, and taxes may reduce take-home benefits if premiums were pre-tax. Individual policies may offer higher coverage amounts, and benefits may be tax-free if premiums are paid after tax.

When should I buy long-term disability insurance?

Many people consider buying when they’re younger and healthier, since qualifying may be easier and premiums are often lower. The right time depends on your income, savings, and how long your household could manage without your paycheck.

Protect your financial future

If the unexpected keeps you from working, long-term disability insurance can help you keep your plan on track. Employer coverage may be a solid start, but an individual policy may help you tailor protection to your needs.

Consider talking with a financial advisor about how disability insurance fits into your broader financial plan.

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