An advisor's guide to long-term disability insurance

Around one in four people will become disabled before they retire. As one ages, the chances of a disability due to an accident or illness only increase. But there's a way to make sure your clients have a safety net — disability insurance. Long-term disability insurance protects your client's paycheck, and by extension, their day-to-day life, if they can't work for an extended period of time — think years or even decades.

What is disability insurance?

Disability insurance is a form of income protection that pays out a benefit if your client can’t work because of an illness or injury. The level of income replacement your client can get and how long their disability benefits last varies by their policy and what type of disability insurance they have.

  • Long-term disability insurance lasts two years or up until retirement and can supplement other coverage.

  • Short-term disability insurance is usually tied to your client's employer and only lasts 3 to 12 months.

  • Social Security disability insurance is free but notoriously difficult to qualify for. 

What qualifies as a disability? 

All insurance policies include a definition of disability, which explains the conditions your client must meet in order to qualify for a benefit payment under their specific plan. 

In most cases, your client doesn’t need to be totally and permanently disabled to receive long-term disability insurance benefits. An injury or illness will qualify them for disability insurance benefits if they are either mentally or physically unable to complete their job, or if they have an impairment that substantially limits their ability to carry out basic life activities.

When your client gets disability coverage, the insurance company will further define their disability using the following terms:

  • Own-occupation disability means your client can’t work at their regular job, even if they still might be able to work at another job.

  • Any-occupation disability means your client can’t work any job.


Questions or want to learn more?

How long-term disability insurance works

Disability insurance pays out about 60% of your client's non-taxed income on a regular basis, just like a paycheck. Some people get long-term disability insurance as part of their employee benefits program, but it may not provide enough protection. Most people need their own long-term disability plan to get adequate coverage. 

The way long-term disability insurance works is that your client pays premiums for a long-term plan, and when they become disabled, they'll file a claim with details about their diagnosis and proof that they are unable to work. 

After the waiting period, they'll begin to receive benefit payments. Disability insurance payments typically stop when your client returns to work, but they may be able to extend their coverage with a rider. 

If your client wants to get rid of their long-term disability coverage, they can always cancel your policy. 

Long-term disability insurance benefits

It takes about 90 days before your client can start receiving long-term disability benefits, which can last until they retire — unlike short-term disability benefits, which pay up to a year. Your client can use disability insurance benefits the same way their use their income: to cover everyday expenses, pay regular bills, and keep up with their larger financial plan.

Long-term disability benefits usually aren’t taxable (unlike short-term insurance benefits), and your client doesn't have to pay them back. They’re also typically larger than disability benefits from Social Security, which is why an individual long-term policy is the best way to protect your client's income. 

Does your client need long-term disability insurance?

If your client can’t go years or months without a paycheck without depleting their savings, they need long-term disability insurance. 

Your client losing their income risks their ability to pay bills or support their family, which can lead to long-term financial consequences — 66.5% of all U.S. bankruptcies and more than 50% of all mortgage foreclosures stem from illness or injury-related medical issues. And a disability is more likely than you think — over 25% of American workers become disabled before they retire, and on average, the disability lasts more than three months at some point in their careers. 

Disability insurance isn’t just for people who work dangerous jobs. Your client can become disabled no matter what they do for work — the majority of long-term disabilities are due to an illness rather than an accident. And if your client took out loans for their education, getting disability insurance prevents them from falling behind on those payments. 

Long-term disability insurance protects your client's most valuable asset — their ability to earn an income — and should be a part of every financial safety net.  Even if they have short-term coverage from an employer, they should consider combining it with a long-term policy for more complete coverage.

How to get disability insurance 

The application process takes about four to six weeks to complete. There are six steps your client needs to complete to get long-term disability coverage:

  1. Shop around and compare quotes from multiple insurers.

  2. Fill out the application paperwork.

  3. Have a phone interview about their lifestyle and medical history.

  4. Take the medical exam.

  5. Wait for an application decision.

  6. Sign their policy and make the first payment.

How much does disability insurance cost?

Your client can generally expect to pay between 1% to 3% of their annual salary for a long-term disability policy. Costs are also affected by their occupation, and some disability insurance companies may offer better rates than others. Disabilities become more likely as your client ages, and rates will increase as they get older so it’s best to get a policy while they're young. 

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