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.
Mike Piper at Oblivious Investor – I have long-term disability through the AICPA’s group plan. The coverage is cheap, but that’s for a reason. (That is, it’s lacking in several desirable provisions.) I shopped around last year and was almost entirely unable to obtain an individual policy due to 1) the incentive a writer has to become “disabled” and 2) not very many years of the level of income I have now. I intend to shop around again every year or so in the hope that #2 having changed will make it possible to get better coverage.
Mike also suggested the Bogleheads Wiki on Disability Insurance.
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