Long-term disability is a good choice for most people because it reduces the risk of financial setbacks if you become disabled. If you don’t have coverage, that period with no income could make it hard to pay bills, support your family, and save for retirement. Think about how your family would be affected if you couldn’t earn income.
Let’s look at some pros and cons of long-term disability insurance:
- Protects your greatest asset – your ability to earn a paycheck
- People buy insurance to protect their home, car, health, and family. Protecting your income is super important. If you make $100,000 a year and can’t work for 4 years, that would probably set you back financially.
- Protects your family
- If you’re disabled and on claim, it can provide meaningful protection so that your spouse isn’t forced to get an additional or different job or even enter the workforce if they were staying at home.
- Benefits are tax-free if you pay for your policy with after-tax dollars
- If you have an individual disability policy outside of work that you pay with after-tax dollars, your benefits will be received tax-free. However, if you have a group disability policy through work, you’ll likely have to pay taxes on them because you either a) will pay premiums with pre-tax dollars or b) your employer pays for all or part of the premium.
- You can spend the benefits how you want
- Benefits are received in cash and don’t require reimbursement, so you can spend the money however you wish.
- Helps you to meet your ongoing financial obligations
- If you can’t work and no longer have income coming in, your debts and financial obligations don’t disappear. You’ll need to continue paying for your home, car, loans, living expenses, plus you’ll likely want to continue contributing to retirement.
- Helps you avoid bankruptcy and debt
- A disability can deplete your savings pretty quickly and even put you into debt. If you have income from your policy, you can avoid depleting your savings and using credit cards with high interest rates.
- Allows you to focus on recovering
- If you are disabled and aren’t receiving income, it can be very stressful. Anxiety about finances can make it a lot harder to recover and return to work.
- Peace of mind
- Knowing you and your family have meaningful protection in place in the event you can’t work because of an accident, illness, or injury, will give you peace of mind in general so that you don’t have to worry about the “what ifs.”
- Disability insurance can be expensive
- Coverage costs more the older you get or the more dangerous your job is. In general, a policy will cost between 1-3% of your income. It depends on your age, gender, job, health, benefit period, benefit amount, elimination period, disability definition, and riders. Women will pay more than men in premiums because women are more likely to go on claim. Generally, the younger and healthier you are, the less expensive it will be.
- Policies can come with exclusions that don’t cover pre-existing conditions
- If you have a pre-existing condition like back pain, it’s likely your disability policy will have an exclusion or limitation related to that condition. If the insurance company offers you coverage with an exclusion, they will insure you, but they won’t cover that specific condition, body part, or disabilities resulting from certain activities. Some exclusions are permanent, while others could be reviewed at a certain time.
- Waiting period
- Policies have an elimination period or waiting period. During this time, you will not receive disability benefits and will need to dip into your savings to pay your bills. Waiting periods are customizable from 30 days to 730 days. A shorter elimination period will make your premiums more expensive and a longer elimination period will make your premiums less expensive.
- If you never experience a disability, you won’t receive benefits
- Obviously if you never have a disability, you aren’t going to receive benefits from the insurance company, but you did pay for coverage for a set number of years. However, the coverage did it’s job and provided meaningful protection to you. Count yourself blessed because you didn’t experience a disability.
The Bottom Line
There are pros and cons to consider when buying long-term disability insurance, but the pros of buying it usually outweigh the cons.