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Long Term Disability Insurance -- Is This The Most Important Insurance You Don't Have?

By Todd Campbell - Sep 2, 2015 at 1:21PM

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A significant number of workers pass on this insurance and that could be a mistake.

Source: Flickr user David Wall

The vast majority of Americans worry over their financial security, yet a large share of them take a pass on long term disability insurance that would protect their income if they became disabled due to illness, accident, or injury.

Despite the Social Security Administration estimating a three in 10 chance of becoming disabled at some point prior to reaching age 65, less than 40% of people in their 20s and 30s sign up for long term disability, according to The Hartford Financial Services Group, which sells long term disability plans.

That's a frightening prospect, particularly considering that the average person with a long term disability is out of work for more than two years, a period of time during which lost income would implode most workers budgets.

Source: Unum Group

What is long term disability insurance?
Long term disability insurance differs from workers compensation insurance, which picks up the tab if an employee is injured on the job, and short term disability insurance, which typically fills in the gap of lost wages due to an illness or injury that keeps you out of work for less than six months.

If a worker suffers a physical or mental disability that prevents him or her from doing their job for an extended period, then long term disability insurance will pay the employee a set percentage (usually between 50% and 70%) of their salary. While there are a lot of reasons why people may file a long term disability insurance claim, cancer is commonly to blame.

The nitty-gritty of long term disability insurance
Typically, long term disability insurance is offered to employees as part of a benefit package, but because employees don't need to sign up for it, many opt out of it.

If your employer doesn't offer long term disability insurance, or you're self-employed, you can still buy it on the open market; however, it can be difficult to qualify for it and a medical exam is likely to be required.

Regardless of whether a long term disability insurance plan is provided through an employer or is purchased individually, long term disability payments continue only for a set period of time, such as five or ten years, or until a specific age, such as 65 or 67.

Of course, like any insurance policy, the devil's in the details. Some long term disability plans exclude certain diseases and pre-existing conditions that others don't and some plans only pay if you can't do any job, not just the job in which you were working when you became disabled.

Some long term disability plans require you to file for Social Security disability insurance, which can reduce the long term disability monthly payment, but that can also help you qualify for Medicare health benefits that aren't covered by insurance after two years.

Long term disability plans also won't continue to pay out your monthly payments to survivors if you pass away while receiving them. They will, however, pay out a lump sum totaling some multiple of the disabled person's monthly benefit if a person dies while they're disabled and the plan offers a survivor's benefit.

Considering options
Long term disability insurance can be sold with a variety of options that increase the monthly premium, but all of these options should be considered carefully before opting against them.

For example, people can add coverage that increases your monthly benefit as your income increases, or add a cost of living adjustment benefit that increases payments to keep pace with inflation, both of which could be worth the added expense.

Because so many people take a "it won't happen to me" approach to long term disability insurance, it's likely too few people carry it. If you're one of them, it may be worth exploring options that are available to you. After all, doing so could go a long way to providing financial security if you become disabled. 

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