Long-term disability insurance replaces lost income

Janet Arrowood

The most valuable asset for almost everyone is their ability to earn income. If you earn $50,000 a year and plan to work another 25 years, that’s $1.25 million without compounding for inflation, raises or promotions. A more realistic number is probably $2.5 million.

What can you do to protect this asset? Consider purchasing long-term disability income insurance. This type of insurance can be purchased on a group or individual basis. It’s different from workers’ compensation since it doesn’t normally cover illness, injury, or accidents that would qualify for coverage under workers’ compensation. Social Security Disability Income offers an option for long-term disability coverage. But the waiting period is lengthy — often more than a year. The documentation and qualification requirements can be onerous. And the benefit is rarely enough to cover anywhere near the amount of lost wages.

According to the Council for Disability Awareness, the average long-term disability absence is 34.6 months. Neither accidents nor work-related injuries are the cause of most disabilities. Musculoskeletal injuries, pregnancies, cancer, heart disease and other illnesses are the main causes.

You can receive long-term disability income insurance benefits that last until normal Social Security retirement age. But the longer the coverage period, the higher the premiums. Still, if you own a small business, the longer benefit period could be critical to the financial survival of you and your business.

Most long-term disability income insurance plans replace between 50 percent and 70 percent of regular income. Since the benefit is normally not taxable, the net result is replacement of almost all take-home pay. Check this consideration, along with the deductibility of long-term disability insurance premiums, with your tax professional.

There’s a waiting period for long-term disability income insurance benefits to start. This waiting period does two things: ensures the disability covered is actually long term and reduces premiums to an affordable level. By integrating short-term disability income insurance with long-term coverage, business owners and employees can maintain close to their full take-home pay for as long as their disabilities and insurance plans last.

Premiums can be employer-paid, cost-shared with employees or paid entirely by employees. If the entire cost is borne by employees, a business might not achieve a high enough participation rate to meet insurance company requirements. Some cost-sharing is usually a good idea.
If your company is comprised entirely or mostly of owners and officers, an employee-paid plan could be a viable option.

In comparing long-term disability income insurance policies, check on a cost-of-living-allowance option so inflation doesn’t erode the benefit. A couple of other considerations: Does the policy offer or require retraining? Are your most likely forms of disability covered — carpal tunnel syndrome for someone who types, for example? Are the waiting periods for the start of benefits too long? Is the insurance company well-rated by various agencies for financial stability? If you filed with the state to exempt yourself from workers’ compensation, will long-term disability income insurance cover work-related illnesses, accidents or injuries?

Be careful in selecting long-term disability income insurance — or any other insurance — based on premiums alone. Long-term disability income insurance is just that — a long-term proposition. Make sure it meets your needs and goals. Different insurance companies tend to “specialize” in different occupations. The company that works best for a medical practice might not offer benefits as well-tailored to a construction firm or information technology consulting company.

Selecting and buying long-term disability income insurance can be complicated. It’s always advisable to contact a Colorado-licensed insurance producer to help you make the best choices and provide a spreadsheet comparison of your options. Check with the Colorado Division of Workers’ Compensation to ensure you understand the limits of workers’ compensation and how it coordinates with both short- and long-term disability income insurance plans. Contact the division by email at cdle_workers_compensation@state.co.us.

The preceding is not a solicitation to buy or sell insurance. It’s intended only for informational purposes. Always work with a properly licensed insurance producer.