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What is long term disability insurance?

When shopping for disability insurance, many people get confused by the different types of disability insurance products available and how they work.

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What is long term disability insurance?

In short, long term disability insurance helps replace your income if you become disabled and can’t work for an extended period of time. It’s designed to protect people from catastrophic illness or injury that would cause you to not be able to produce an income. The amount the insurance company will pay you is typically capped around 60% of your gross income.

How does long term disability insurance work?

When you buy a long-term disability insurance policy, you enter into a contract with an insurance company. You make regular premium payments to the insurer, usually monthly, quarterly or annually. In exchange for those payments, the company agrees to pay you contracted benefits in the event you suffer a disability that limits your ability to earn income. The benefits from the insurer essentially replace some or all of the income you lost by being unable to work.

What is the difference between long term and short term disability insurance?

Short term disability insurance is similar to long term disability insurance but only covers you for as short as only ten weeks and is typically provided by employers as a part of group benefits. Once the benefit period is up, short term disability insurance will stop paying benefits. Long term disability insurance pays benefits if a prolonged injury or illness affects your ability to earn income and can be offered as a group benefit or purchased as an individual insurance plan. Benefits are taxed differently depending on whether the policy was paid by the employer or by the individual.

Disability insurance replaces your income if you become disabled.

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How Much Does Disability Insurance Cost?

The cost of disability insurance depends on your personal traits and the features of your disability insurance policy.

Personal factors that affect the cost of disability insurance:

  • Your Age. The older you are when you apply for coverage, the more expensive your disability insurance premiums will be. On average, the cost of disability insurance goes up by 4% every year for males and 2.5% for females.

  • Your Health. Disability insurance companies will assess your health through the process of medical underwriting and will look at your height, weight and prior health history to determine your overall health. Individuals who are less healthy than others can see their premiums increase up to 20%.

  • Tobacco Use. Individuals who actively smoke or use tobacco products will pay up to 25% more for disability insurance than non-tobacco users.

  • Where You Live. Some states see higher rates of disability insurance claims than others, so where you are located can affect how much you pay (spoiler - residents of California will pay the most for disability insurance).

  • Your Occupation. Disability insurance companies classify different jobs into occupation classes. Medical specialties can be classified differently and may pay more or less for disability insurance.

Policy features that affect the cost of disability insurance:

  • Benefit Amount. Like all insurance, the more coverage you need the higher the cost will be.

  • Benefit Period. The longer the insurance company is required to pay you benefits, the more expensive disability insurance will be. Benefit periods can be 2, 5 and 10 years or will pay to age 65 or 67. Most doctors will purchase policies that pay benefits to age 65.

  • Waiting Period. The waiting period is the amount of time an insurance company waits to start paying your benefits after you become disabled. You can select a waiting period of 30, 60, 90, 180 or 365 days. The shorter the waiting period, the more expensive disability insurance becomes. Most applicants select a 90 day waiting period.

  • The Definition of Disability. Disability insurance is a contract between you and the insurance company, and the policy states what determines whether you are considered disabled and are eligible to receive benefits. An own occupation disability insurance policy is the most comprehensive definition of disability and will allow you to receive benefits if you can't practice in your specific medical specialty, but may be able to work in another. An own occupation definition of disability will make your policy more expensive, but is essential for doctors.

  • Additional Riders. Riders are extra features that can be added to your policy and will increase the cost of disability insurance. Common riders include residual and partial benefits, cost of living adjustments, additional benefits for catastrophic injuries and student loan benefits.

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