A Guide To Understanding Long-term Disability Insurance
Many of us do not always recognize the potential danger of becoming permanently disabled. The U.S. Census says that you have about a 1 out of 5 chance of becoming disabled for at least some period of time. The average duration for a long term disability (LTD) is about a two-and-a-half-year absence from employment. Long Term Disability is a vital component in a financial plan to help mitigate that risk. It is also important to understand some of the basic features of long term disability insurance before purchasing a policy.
What is Long Term Disability Insurance?
This type of insurance is fairly basic to understand. LTD picks up where your short-term coverage ends. Short term coverage will typically cover you for a period of about 3-6 months. If you are deemed to be long term disabled, most policies will typically cover replacing up to 50-60% of your prior income, with certain limitations. While 60% seems like a substantial reduction in income and insufficient to maintain most people’s current lifestyle, it is certainly better than no income. Benefits, when approved from a LTD policy, will typically not be paid beyond the age of 65.
How do you buy Long-Term Disability Insurance?
One of the most common ways is through a group plan with your employer. In fact a large number of employers provide LTD insurance for free as benefit for their employees. In such cases, it may make sense to buy additional supplemental insurance policy to bring the replacement value of your income closer to 100%. The cost of LTD insurance as part of a group plan is, like most group policies, often less expensive than purchasing this coverage privately.
However, there are some serious considerations that you should think about before buying a policy as part of a group plan. One such consideration is qualifying for benefits. Assuming that you are legitimately disabled and file for benefits, this does not mean the insurance company will approve the claim. Unlike life insurance where death is not debatable, a disability can be, and often is, disputed. In an event where you end up in a dispute over eligibility with an insurance company, this can be a long exhausting process with an employer-provided plan. The reason is that group insurance is regulated under the Employee Retirement Income Savings Act (ERISA). If you feel you are not receiving the benefits that you are entitled to, you may wish you take legal action against the insurer. In such an event under a group plan, this is a matter of federal law. According to ERISA, before there can be a federal lawsuit you must first “exhaust all administrative remedies”. This means you have 180 days to appeal a denial and then the insurance company can wait another 90 days to respond. While this process plays out, you are potentially without income as you’re unable to work. Furthermore under ERISA, the insurance company has what is known as discretion to administer their own policies. This means you must be able to demonstrate that the insurer abused their discretion. Most attorneys with expertise in the field of disability claims will tell you that this is a fairly tough standard to meet.
After this whole process is played out, your last option is to file a federal lawsuit in United States District Court. But under ERISA, the laws do not work the way many might expect. The cases are ruled on by a judge, not a jury. Testimony by the disabled is typically NOT permitted. This can make it difficult for your attorney to make their case on your behalf. Rather the judge makes a decision based on briefings with the attorneys involved. All of this is a long, difficult, and cumbersome process to fight a denied claim. At a time when you are battling a disability, it is easy to imagine how hard it might be for you to be successful. Additionally, this can be quite a bit of added stress. Clearly not all claims for LTD are denied by insurers, however if you are purchasing LTD insurance through a group policy it is important to understand what the risks are should your claim get denied.
Should you purchase LTD insurance as an individual, you will almost certainly pay a higher premium for such coverage. However, should a claim get denied and you end up having to take legal action, you would end up in state court. In such a circumstance, the legal process is a much more favorable for the insured. Most attorneys who represent clients in such cases will tell you that they will have much more latitude to make a case on your behalf, and a greater chance of a successful appeal. When weighing the increased cost in premiums, you should consider the risk of a potential dispute.
Tax Benefits…Typically if you paid for the policy on an after-tax basis, when benefits are paid they would be paid to you tax free. In most cases the opposite is also true. If you paid for the benefits on a pre-tax basis you should expect the income to be taxable. Part of the reason for the taxation is that you are receiving income. Benefits could potentially be paid over years few years, or potentially up to the traditional retirement age. With most other forms of insurance, like auto or homeowners coverage, you are not receiving income, but rather replacing a loss, also referred to as “making you whole.” In fact, in most other insurance claims, you are still incurring some type of loss even after the benefit is paid since there is typically a deductible to be met.
In the field of financial planning, LTD insurance is a vital component of any insurance package. Anyone who is not already retired should own such coverage. It’s important to understand what your policy’s features and benefits are and what possible restrictions exist. You should check with your insurance agent or your employer’s benefits office to find out what coverage is available so you can make an educated decision about the best course of action. Additionally, it should be noted that there are additional resources for those who become long-term disabled. Those include Social Security Disability (SSDI), but it should be noted that applying for SSDI is another time-consuming process that typically requires you to be disabled for some time before you qualify and receive approval. Should you qualify for SSDI, you can be almost assured that your claim against a long-term disability policy will be approved. Yet the inverse is not always true. It has historically been more difficult to get an SSDI claim approved. Lastly, SSDI on its own is not likely to be enough to be a suitable income replacement. Should you receive approval for SSDI, the benefit will be coordinated with any accompanying LTD insurance coverage. The combined benefit amount cannot exceed your income prior to the disability.
LTD insurance is just one part of a complete financial plan. Yet, an important aspect that is all too often overlooked as many individuals presume they will not be affected. While a disability may be a lower probability event for many younger individuals, the risk of a fire destroying your home is also pretty remote, yet we all maintain homeowner’s coverage on our residences.