During Open Enrollment, Don’t Overlook Long-Term-Disability Insurance

It’s fall. And for many people, that means their annual benefits enrollment period has come again. This is the time when you can make changes to benefits options from your employer. Everyone knows about life, vision, dental, and health insurance, but there is another type of insurance that your company might offer: long-term disability insurance.

If your employer offers long-term disability insurance, don’t overlook it.

So what is long-term disability insurance? Why would you need both that and health insurance? Well, your health insurance helps to cover the costs of medical care. But what if your illness, injury, or accident prohibits from returning to work for an extended period of time?

Health insurance doesn’t protect you from loss of income due to an inability to work — but long-term disability insurance does. If you can’t work for an extended period of time, this type of insurance pays you a portion of your salary.

Your employer may or may not offer long-term disability insurance. And if it does, you might be required to pay a premium for coverage. This is often what causes people to opt out. After all, you’re most likely already having money deducted from your paycheck for income taxes, Social Security, Medicare, and contributions to other benefits. Having more money taken out for long-term-disability insurance may not seem worth it.

But think again.

The risk of becoming disabled is real. According to the Social Security Administration, one in four of today’s 20 year-olds will become disabled before reaching age 67. You don’t have to work in a hazardous occupation to face this risk. You could get in a car accident, slip and fall, or get a serious illness. Cancer is a real threat, and treatment can take you out of work for a very long time.

You need to ask yourself: “What would happen to me financially if I couldn’t work?” According the Council of Disability Awareness, the average length of a disability claim is 34.6 months. Do you have enough in savings to cover your living expenses for two to three years? What if your condition is permanent? You’d need to have another source of income to cover the rest of your life.

Before you opt out of long-term disability insurance, you need to assess what impact a loss of income would have on you and your family. Could you pay the mortgage and other living expenses? Would your spouse have to find additional work? If so, what additional stress would this put on your family? Would you need to hire someone to assist with regular household chores and maintenance or childcare?

If you’re young and single, you’re not immune to these issues. You still need to ask yourself similar questions. If you could not work for two to three years, or maybe even the rest of your life, how will that affect your ability to support yourself? Unless you’re already very wealthy, the answer is: “greatly.”

It’s better to think and plan now, instead of when you’re already facing hardship. If something terrible were to happen to you, knowing you have some income coming in could help reduce the stress of the situation.

Long-term disability insurance typically pays 50 to 60% of your salary if you become disabled. If your employer offers this benefit, it may pay all or part of the cost. Anything the company doesn’t cover would be your required premium. If you’re paying the premiums with after-tax dollars, you will likely receive the benefits tax-free. If your employer is paying the premiums, the benefits may be subject to income tax.

There is a waiting period before long-term disability benefits kick in after an accident or illness. Usually it’s three to six months — after short-term disability coverage ends. Your employer might provide short-term disability, or you might need to make sure you have an emergency fund to cover your living expenses for the waiting period.

How long you’re eligible to receive benefits depends on your specific policy. It could be just a few years, or it could be up until your retirement date. Once your receive your long-term-disability benefits, they will continue until you are able to return to work or for the number of years stated in your policy, whichever comes first.

There are scenarios where you may become partially disabled. This means that you may be able to return to work, but not to your same job or the same number of hours. If you return to work, but the salary is substantially less than what you were making before, your long-term-disability benefits may fill the wage gap between your current and former position.

If your employer does not offer long-term-disability insurance, you can still obtain an individual policy from an insurer. Unfortunately, it may be more expensive. But if you have an accident, it may well be worth it.

You may also find your employer’s plan is insufficient to fill the budgetary gap that would be created if you were unable to work. If this is the case, you can obtain an individual policy to supplement you’re your employer offers.

If you’ve decided you want long-term disability insurance, don’t wait. Once you become disabled, it’s too late to obtain coverage.

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