February 12, 2009

Do you need Long Term Disability (LTD) insurance?

Long Term Disability (LTD) insurance is insurance that will pay you a monthly benefit if you become disabled and are unable to work. Many employers offer this as a benefit. If you're lucky enough to have the employer pay for it then you are already covered. Some employers will offer it as an optional benefit with group rates that the employees can opt into. Other employers will not offer it as a benefit at all. If you can afford it then I'd recommend getting it.

Why is LTD important?

If you become disabled you may not be able to work. You'll not be able to contribute to the support of your family.

The Council for Disability Awareness has a number of statistics about disabilities. A few notable items they cite are:

  • An illness or accident will keep 1 in 5 workers out of work for at least a year before the age of 65.
    Life and Health Insurance Foundation for Education, November 2005
  • One in 7 workers can expect to be disabled for five years or more before retirement.
    "Commissioners Disability Table, 1998," Health Insurance Association of America, the New York Times, February 2000
  • The average long-term disability absence lasts 2.5 years.
    Commissioner’s Individual Disability Table A

So the chances of having a long term disability during your life time are not small.

With the chances of being disabled 1/5 or 20% that is a little more likely than the chances of dying between the ages of 25 and 65. People consider life insurance mandatory but think LTD is optional, but its as likely or more likely that you'll be disabled than that you'll die.

This brings us to :

Can you afford LTD?

If you are already struggling to make your bills then I'd consider LTD more of an optional item. Pay up your emergency fund and pay off the credit cards first. Food, clothing, shelter all take top priority of course. I'd put medical insurance above LTD too. But once you get your basic bases covered then its time to make sure you're covered for things like life insurance or LTD.

If you have any discretionary spending and have your finances under control then LTD is certainly something you should try and get.

What if you're self employed or your employer doesn't offer it?

If you are on your own and can't get a policy through work then you are faced with finding an individual LTD policy. Group policies are what you will get via your employer if they offer one. It seems that LTD is a lot easier to afford if you are in a group policy. According to Insure.com the average group policy is $234 a year in 2007 and the typical individual policy is 5-10 times the cost of group rates. This makes it much more difficult to afford LTD if you're buying it on your own.

Social Security Disability might help some.

If you are paying into Social Security then you also receive the benefit of disability insurance. If you have a long term disability then you can apply for a disability. It can be difficult to get a disability approved by Social Security and the claims and approval process can take a long time.
Backlogs for social security disability claims can be hundreds of days and nationally the average is over 1.5 years.

If you are approved then the amount of the benefit will be a fraction of your current income. You can use the Social Security quick estimator to find out an estimate of the disability benefits. As an example I checked the benefits for a 35 year old making $40,000 and it was $1,310 a month or about 39% of their income, but it will vary depending on age and income.

So I wouldn't count on social security to heavily. Getting a claim approved can take a long time and if you are approved the benefit is not extremely high.

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