It occurs to me that very few consumers, and even fewer agents, truly understand the dynamics of disability. I will dispense with quoting statistics; you can get those from promotional material from any carrier. Besides, statistics never convinced anyone to buy anything. Like other insurance products, your motivation for taking action is emotional, not logical.
Of all the insurance purchases you will make, the one that is the least logical is life insurance. Why buy a product that will never be activated until you are dead and gone? Clearly the motivation for buying life insurance is emotional, not logical.
But what about long term disability, also known as LTD. Most people have some form of LTD coverage in the form of Social Security but only about 30% of the population has additional coverage to supplement the government plan.
Long term disability is actually a misnomer. It should be called long term death because those who are disabled for any length of time more often than not suffer a long term financial death.
Most LTD policies are designed to kick in after a waiting period. The most common waiting period is 90 days although some will be shorter (30 or 60 days) and others may be longer (180 days or even longer). Simply stated, this means your benefit does not begin until you have been unable to work for at the calendar days in your waiting period.
The most common benefit periods, the time when you will receive benefit is 2 years or 5 years. Some policies pay benefits to age 65 and a few, very rare, pay for life.
To keep things relatively simple, let’s say you have a policy with a 90 day waiting period and a 5 year benefit period. The timeline for certain events is as follows.
Day 1 – 90 there is no benefit payable. You may or may not have a paycheck coming in depending on your situation. Some employees accumulate sick days while others have a plan that may be offered by the employer to continue some or all of your pay for a period of time.
Once you have satisfied the waiting period you may apply for benefits. The amount payable, once you are approved is usually around 60 – 67% of your gross pay. When you file a disability claim it may take a month or more before it is approved and the money starts to flow back to you. It is not unusual for a plan with a 90 day waiting period to issue the first check 5 months after you are disabled.
This is important to keep in mind, especially if your paycheck has stopped but your normal monthly bills still come in.
In addition to regular living expenses, you may have to pay the full cost of your health insurance if you have an employer plan. For a single employee this could easily be $300 - $400 per month; families could pay $1100 to $1500 per month or more.
It gets’ worse.
If you are disabled your expenses usually increase. Medicine. Doctor visits. Child care.
So let’s say your claim is approved and benefits start to flow . . . somewhere around the 5th month of your disability. That is around the time you can make your initial claim for SSDI (Social Security Disability Income).
Most SSDI claims are denied.
They are denied once. They are denied twice. Somewhere around the third time you apply is when you might expect approval for your SSDI benefit. Most SSDI claimants are finally approved around the 18th month of your disability. The good news is when your SSDI claim is approved they pay you retroactively back to the first month of your eligibility. That means you expect about a years worth of SSDI payments in a lump sum.
The bad news is your LTD carrier is going to want that money.
Most LTD plans have a Social Security offset. That means if your benefit is $3000 per month with an offset, and your SSDI benefit is $1200 per month, by the time you get your SSDI award of around $15,000 about $14,000 of it.
The news get’s worse.
Somewhere along the line your employer changed you from active status to disabled. That means your health insurance becomes COBRA which means it is finite. Most likely you can continue your COBRA for 30 months. That is the good news.
But back to the LTD benefit.
Most LTD plans define disability as the inability to perform the duties of your regular occupation.
For two years.
After two years the definition changes to the duties of ANY occupation.
This means your LTD benefit could end after two years unless the disability is so severe as to prevent you from earning wages from any job.
Long term disability. Long term financial death.