Long-Term

LTD picks up where short term disability (STD) leaves off. Once your STD benefits expire (generally after three to six months), the LTD policy pays you a percentage of your salary, usually 50, 60, or 66 2/3 percent. You then receive benefits until you reach age 65.

If you pay your own premiums and do so with after-tax dollars, your disability benefits will be tax-free. If your employer pays for the policy, most likely with pre-tax dollars, your disability benefits will be taxable.
Most disability insurers will work with employers to try to get you back to work as soon as possible. While disability insurers want to see people healthy, rehabilitated, and back to work, they also save significant dollars if a claimant quickly returns to work.

You'll most likely find your disability insurer "managing the claim" if you are "partially disabled" — meaning you can still work, but in a job that pays substantially less. LTD will pay you additional money if you decide to take a lower paying salary, as outlined in the following example.

Let's say you worked in a warehouse lifting crates making $40,000 annually. You then hurt your back at home and are forced to take a desk job that pays $20,000 annually. If your LTD policy was paying you 60 percent of your original $40,000 salary, it will now pay you 60 percent of what you are making in the lesser job. So now instead of staying at home and collecting $24,000 from your LTD policy only, you work at the lower paying job and make $32,000 (in addition to the $20,000 salary, you also get $12,000 in disability benefits, which is 60 percent of $20,000).

If you become disabled and begin receiving benefits, you will no longer have to pay premiums. Also, if you pay your premiums with after-tax dollars, your disability payments will not be treated as taxable income. If your employer pays for your group disability insurance with pre-tax dollars, your benefits will be treated as taxable income.

Buying individual disability insurance

If your employer does not offer group disability insurance, or if you feel your existing group policy does not provide adequate coverage, you may want to consider buying an STD or LTD individual policy. According to the ACLI, a 35-year-old person who has a disability for 90 days is likely to be disabled for an average of three years. If you do not have individual LTD, going three years without working could be financially devastating.

Individual disability pays you a flat amount each month, and most often you will not be paid more than 80 percent of your current salary. The insurance company examines your occupation, income, and other sources of insurance when determining whether it will cover you and what your premium will be. When it determines your rate, the insurance company places you in a rating class with people who have similar characteristics such as age, occupation, medical condition, and income.

Most policies are sold on a "non-cancelable" or a "guaranteed renewable" basis. Non-cancelable means that after you take a medical exam and the insurer issues the policy, the insurer cannot cancel the coverage or raise your premiums. If you buy a policy on a guaranteed renewable basis, the insurer cannot cancel the coverage as long as you pay premiums, but it can raise rates. However, the insurer cannot raise rates on an individual basis. Rather, it will raise rates for the whole group if you are part of an insured group that has experienced a very high number of claims.

Generally, you can buy individual disability policies that will cover you for two years, five years, or until you turn age 65. Most individual policies also have features that allow benefits to keep pace with inflation or gradual salary increases, such as a cost of living adjustment (COLA), which adds a percentage to your coverage each year.

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