Long-term disability considerations

Many of us are familiar with insurance for your home, auto and life, but the reality is – we don’t often know our specific coverages until we need to make a claim.  Insurance has become so specific it’s worthwhile to contact you carrier and become more familiar with exactly what your policy is going to cover in a time of need. In our society, there is insurance for your pet’s medical bills, canceled vacations, or a defective home appliance. If you have an insurable interest in something, there’s likely a policy out there to cover you.  However, one of the most overlooked types of insurance is one that protects your income, or lack thereof, in the event of an extended long-term disability.

When you hear that a friend or family member is “on disability” many of us assume that most, if not all, of their income is being replaced, but that is not usually the case.  Generally, there are two types of disabilities;  “Permanent” or “Non-Permanent”.  Some common disabilities are “short-term” such as maternity leave or “longer-term” such as a chronic illness that prevents someone from returning to work in any meaningful way; but I will focus on long-term disabilities here.

Under limited circumstances, a person can file for Social Security Disability Income (SSDI) and be approved for benefit payments for the rest of their life or until they reach their Full Retirement Age (FRA). Upon reaching their FRA the benefits convert from SSDI to Social Security Retirement benefits. There will be a gap if your FRA is 67, and your LTD policy only pays benefits until the age of 65, another reason to pause and consider the consequences and impact on your life.

There are two primary types of insurance policies:  group LTD insurance offered by your employer or a private policy that you purchase on your own.  More importantly, there are two methods for paying for LTD insurance that determine how your benefits will be taxed.  Premiums can be paid with after-tax income (non-deductible) or pre-tax income (deductible).  Group LTD policies typically have lower premiums than individual policies, but typically offer lower benefits, or may be combined with other disability benefits (i.e. Worker’s Compensation or SSDI).

For a private LTD policy that you own and pay for, the benefits are excluded from your taxable income. On the other hand, if you are covered under a policy that your employer pays for (with pre-tax income), expect the benefit payments to be considered taxable income.  This is where it can get confusing.  Your employer may offer access to a group plan but require that you pay the premiums on an after-tax basis.  In this case, you may have the benefits “reduced”, “offset” or “integrated” by other non-salary payments you are eligible to receive, such as Worker’s Compensation (if the injury took place while on the job).  The important thing to note is that LTD benefits provided in a group plan are typically computed after Worker’s Compensation, SSDI and/or pension payments are calculated. You can see that the carrier is not going to allow you to collect as much as you may have originally believed and it’s unlikely you will receive more than 60% of your wages with a combination of Worker’s Compensation, Pension and LTD benefits.

LTD policies can be complex when it comes to understanding basic coverage, exclusions and elimination periods (which may be up to 180 days or more).  This is only meant to serve as a primer and general overview of LTD.  As with life insurance, we at Rockbridge generally recommend owning a private policy that is not affected by employer changes.  Private policies are typically more expensive and require an underwriting process that evaluates your age, health and medical history. The fact is, the loss of your future earnings is something you may wish to consider insuring against, for the financial well-being of your family, especially if you are under age 60.  If you feel the need to review your situation and perform an LTD needs analysis, please contact your advisor at Rockbridge.