Do You Need LT Disability Insurance?

Disability Insurance

Do you need disability insurance?

Do you have enough insurance?

In the past, I’ve stated that there are 5 types of insurance that you need.

I have four of the five.

I don’t have long-term disability insurance.

This fact has bothered me for some time. I’m finally beginning the process of determining if I really need long-term disability insurance, as well as, how much and what type to get.

Long-term disability insurance or LTD insurance is insurance that is meant to replace part of your income in the event that you become disabled for an extended period.

Do I need this? Do you need this?

One of my favorite things to do when I have a complex personal finance issue come up in my life is to poll my peers and share their responses.

I asked a few other friends/bloggers these questions (I welcome your answers to these questions as well) and I follow with their answers:

Do You Have Long-Term Disability Insurance?

If so, why do you have it and what type/amount do you have? If not, why and do you plan to get any?

Kyle from Amateur Asset Allocator – No. I don’t have any dependents and as it currently stands, the standard Social Security disability payout would be sufficient to sustain my current lifestyle. If I had any children I would definitely consider purchasing LTD insurance.

Ryan from Cash Money Life – I don’t have LTDI, but my parents do (they are in their mid to late 50s). My wife still has the ability to work and earn enough to cover most of our needs, but depending on how bad the disability would be, who knows if it would be enough?

Jeremy from Gen X Finance – I personally do not have any disability insurance because of the nature of my work, but since we do have children and my wife has a job that could be lost due to a disability, she has both short and long-term disability insurance that is provided through the group plans offered by her employer. If I ever stopped being a writer and had to go back into the regular workforce to provide for my family, then I would almost certainly pick up disability insurance on myself as well.

Jeremy shares his thoughts in more detail at “Is it Smart to Buy Disability Insurance?

Pinyo from Moolanomy – I don’t have LTD. That said, I did buy optional LTD when I was previously employed with Xerox. At that time, I didn’t even think about my ability to qualify with the side income I was generating.

Mike at Money Smarts Blog – I have LTD & STD from work and I’m in the process of getting an additional LTD plan outside of work because my group (work) plan is insufficient in my opinion. The policy I’m getting does allow you to earn income and will pay the difference. My payout is set at $5000 per month (tax free) so if I earn $2000 from a job or a business, they will still pay $3000. Not all policies are like that. One of the reasons my work insurance is insufficient is: The payment is not indexed to inflation. So for example if I became disabled tomorrow, I would get 85% of my net income tax free, which is fine. But over time inflation will reduce the purchasing power of that money so that by the time I’m in my 60s, the amount could be less than half of what it is now. My new plan does index the payment. If you are permanently disabled, there is a chance the money you get from LTD will likely be your only income, so you have to be able to live and save for retirement as well since LTD payments stop at age 65. Obviously, if you are single/married/dependents etc makes a difference in your planning. You also have to ask yourself will your spouse stick around for the next several decades if you are a basket case? In my case, I’m the only breadwinner, so getting proper LTD is more important to me than someone who has two incomes. It would be bad enough if I couldn’t earn any money, but I would still be eating etc and might need extra care and could end up being a huge burden on my family.

Robb from Boomer and Echo – I have long term disability coverage through my employer (Public Sector – University). The policy states that it will provide 65% of the first $4,500, and 45% of the balance of your pre-disability monthly earnings up to a maximum of $6,000 per month for the length of time that you are totally disabled, or until your 65th birthday. Like Mike’s policy, it’s not indexed to inflation, so I might look for an additional policy to top-up the plan.

Robb also wrote, “Understanding Disability Insurance.”

Rob at Dough Roller – I have LTDI through my employer as part of my compensation (one of the many reasons I don’t blog full-time). It’s very expensive to buy on your own, so I’d probably do without if I were self-employed.

Jeff from Good Financial Cents – I do have it. I got a really sweet deal offered by my previous broker/dealer that would pay me $4000/mo in the event I was unable to run my practice and would continue to do so from day 91 to [age] 65. Right now it only costs me $1022 per year. Very similar to an online business, there is a lot of gray area on me to continue to receive revenue since I wouldn’t be servicing my clients. Definitely shop around. I did a quote with another carrier and they offered a $3k maximum benefit and was only good for a certain number of years – maybe 5 or so? And the premium was almost 2 1/2 times what I’m paying.

Bonus Question: Disability Insurance for the Self-Employed

I’m a self-employed blogger in a single income household. Since my blog income is somewhat passive and will continue even if I stop writing, do I even need long-term disability insurance?

Would LTDI even cover you in that case? I was under the impression that the inability to earn an income would be required to cash in. But if the income keeps coming anyway, would that really qualify? I have no idea, but I can see an insurance company making that claim. – Kyle

I’m not sure you would even be able to receive a disability claim if you own an online business and receive income from it, even if you aren’t actively participating. I would be interested in seeing the legal opinion on this type of situation, and if it’s true that most insurers wouldn’t pay on this type of claim, it would make perfect sense to stay away from disability insurance in cases like that. – Jeremy

Regarding your bonus question – in my case, I pay most of the blog earnings to my wife so hopefully that wouldn’t count against my LTD payment. Of course, there are no guarantees. I’m not sure if you can say you don’t need LTD because a blog is ‘passive’. Think about what kind of disabilities you could have – you could have severe mental and/or physical problems – you might be in a coma for the next 30 years. Worst case scenario you won’t be able to run the blog and the best course of action would be for your spouse/caretakers to sell it and then you will live off the LTD assuming you have it and still need it. – Mike

Summary of Information

Okay, I know I just threw a lot of information at you there. I’ll try to sum it all up in a few bullets below:

  • A good place to start your search for LTD insurance is through your employer or trade association, as it’s considerably more difficult and expensive to get coverage elsewhere. Additionally, if your spouse works and has access to a decent LTD insurance plan, see if you can simply rely on that.
  • The devil is in the details. It seems coverage can vary greatly from plan to plan, so make sure you understand what’s in your policy and work with an agent who will explain things to you.
  • Some factors that affect your policy: when coverage begins once you’re disabled, how long the benefits last, what percentage of your current income the insurance will replace, whether it contains an “own occupation” rider (meaning, you will get benefits if you can’t perform your current occupation, not “any” occupation).

This gives me some good information to start my search for a good policy. I’m going to speak with an insurance agent today about my bonus question (regarding my business’ continual income) and provide him with some information to gather some quotes. Stay tuned for a part two.

Image by The U.S. Army

Related: Understanding Your Small Business Insurance Needs

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  1. retirebyforty says:

    I have both LTD and STD through work. Once I leave my job, I’m not sure if I will sign up for another LTD plan since my income will be minimal at that point. I took advantage of the short term disability for 2 months a while back. I had some dizziness issue and the STD payment really helped out. 

  2. Nice post Phil.  The responses were all interesting and offer a good perspective on this critical issue.  I view disability insurance  as important coverage to have if feasible.  You raised some interesting issues regarding this in light of the nature of the blogging business.  I recall when I first left the corporate world to go out on my own that my wife made it very clear that I WOULD obtain disability coverage from the outset.  At the time my wife didn’t work and our kids were 3, 5, and 7.

  3. BoomerandEcho says:

    Thanks for the mention, Phil.  At age 30 there is a three-in-one chance that you will become disabled at least temporarily (90 days or less) at some time before you die.  After age 50 the odds are two-to-one.  Having this coverage is important and it becomes even more complex when you’re self-employed.  
    I’m interested to hear what you find out from your search.  Good luck!

  4. Mike Holman says:

    Good article Phil.  One difficulty with disability insurance is that there are an infinite number of disability scenarios and there are many different products available.  It can get quite complicated when you are discussing different options (riders) for each policy so get ready for some information overload.
    Life insurance is so much simpler – either you are dead or you are not. 😉

  5. My husband has LTD. It’s a policy that would kick in after 6 months of a qualifying disability, which results in a lower annual premium for us. It was like $350-400/year or so for him (he’s 27 and works in an office). It would replace enough income for us to get by comfortably, but we’d have to make some cuts. 
    It’s a private policy, as the one through his workplace wasn’t worth a darn at all.

    • Philip Taylor says:

       @Kacie How long do the benefits last, Kacie? A few years? Till retirement?

      •  @Philip Taylor It’s either age 62 or 65…I forget. Hopefully he’ll be retired by then anyway!