Disability Insurance Planning

Long-Term Disability Insurance

The idea behind long-term disability (LTD) plans is to replace a portion of your paycheck for a longer period of time. LTD benefits are often available through employer-sponsored plans, in which your employer may pay for some or all of your premium. LTD policies may also be purchased on the private market, and there are some significant differences between these two, which we’ll discuss below. (Note that for both types of policy, if your premiums are paid with pre-tax dollars, any future benefits will be taxed; if your premiums are paid with post-tax dollars, any future benefits will be tax free.) Since LTD benefits typically pay a percentage of current income, it may be wise for students to consider working full-time instead of continuing school, in order to solidify their LTD benefits, whether through an employer, through private insurance, or both. (Note that social security disability also has work requirements to qualify. See below.)

Each policy’s definition of disability and terms may vary, and it is very important to be familiar with your particular policy. There are typically two types of policies: own occupation policy and any occupation policy. The “own occupation” policy defines disability as the inability to work at your regular occupation. The “any occupation” policy typically defines disability as the inability to work at any occupation. Most policies adopt a hybrid of the two policies, which may include “own occupation” language for the first two years, and then a change to the “any occupation” language for the duration of the claim. Private LTD policies often allow for additional policy riders that may be important to consider, such as partial disability (supplementing your income if you are no longer able to work full-time but could still work part-time), longer “own occupation” time periods, etc. The waiting period typically begins after entitlement to short-term disability ends, which is usually 3-6 months. 

When purchasing a private LTD policy, you must qualify on the basis of your health, so it is a good idea to purchase your policy when your health and treatment are optimized. (This qualification is usually not required for employer-sponsored plans.) If you already have a diagnosis of idiopathic hypersomnia (IH) or a related sleep disorder, then it is possible that your private LTD policy will exclude that disorder. Even if that is the case, you may still wish to consider purchasing the policy, because there is a significant risk of developing other disabling conditions during the course of your entire lifetime. Musculoskeletal disorders, cancer, and pregnancy are the most common 3 categories for LTD claims. (Read more HERE.) “A 35-year-old has a 50% chance of a disability lasting 90 days or longer before they reach age 65, with 1 in 7 having a disability that lasts 5 years or longer in their lifetime.” (Read more HERE.) 

Note that if you apply for LTD insurance and are denied, you will likely not be approved in the future. (When applying for LTD, you will always be asked if you have ever been denied in the past.) Therefore, it may be wise to negotiate for even a partial approval, even if you’ve already decided you don’t want to purchase the policy for whatever reason. 

Private LTD also differs from employer-sponsored LTD in that private policies are portable when you change jobs, including moving to self-employment or a smaller employer that may not provide LTD. Private LTD may also cover a portion of your income when you are between jobs. In addition, private LTD is not regulated by the ERISA* laws that govern employer-sponsored LTD. The ERISA laws strongly favor the insurors and have the effect of generally making it more difficult to receive your benefits from an employer-sponsored policy than from a private policy. If you become disabled, having a private LTD policy can mean the difference between waiting weeks/months for your benefits and waiting years for your benefits as you go through the lengthy appeals and possibly legal battles that are more likely with ERISA-governed policies and social security disability. Therefore, if you can qualify for and afford private LTD, it may be very wise to carry it instead of employer-sponsored LTD. For the most comprehensive coverage, purchase both if you can. (Read more HERE.)

In order to receive long-term disability benefits, it is important that you have the support of your treating doctor, as the insurance company typically requires ongoing reports from the treating physician. Many long-term disability policies require that you apply for Social Security disability benefits as well, and will offset the amount of long-term disability paid by the amount of Social Security disability benefits for which you are eligible. The insurance company may also request an Independent Medical Examination (IME) to assess your medical condition, including the treatment that you need, whether your condition is expected to be permanent, and what impact your condition may have on the ability to work. It is also important to know that often insurance companies will employ the services of a private investigator to collect additional information (including surveillance) on your ability to perform daily activities, such as driving and grocery shopping. 

Once you realize that your illness is significantly interfering with your ability to work and leading to your disability (as defined by your policies), it is important that you do not wait to file. If you wait to apply, you may already be working fewer hours, making less money, and therefore having reduced benefits (which are a percentage of your income) because of your disabling illness. Or your employer may already be disciplining you and planning to terminate your employment, after which pursuing LTD through your employer-sponsored plan can be substantially more difficult.

*ERISA: Employee Retirement Income Security Act, which governs most employer-funded group insurance plans