Is Long-Term Disability Insurance Worth the Money?

If you’re interested in financially protecting yourself, you might consider a long-term disability insurance policy. Long-term disability insurance is designed to replace a portion of your income if you’re ever injured or if you fall ill in a way that prevents you from working. This can be massively beneficial, and provide you with peace of mind, but it’s not without its costs. To enroll in a policy, you must pay a premium (usually monthly). 

Is it worth the money for the average consumer? 

How Long-Term Disability Insurance Works

Let’s start with a basic explanation of long-term disability insurance. When you enroll in a policy, you’ll commit to paying an ongoing premium, often on a monthly or annual basis. This premium will vary depending on your age, health, and risk profile, with people more likely to be disabled paying more than people less likely to be disabled. 

If you suffer an illness, injury, or other condition that prevents you from working for an extended period of time (several months to years), long-term disability insurance will activate. After a waiting period (usually 90 days), you can start collecting benefits, which will compensate you for a portion of your typical salary. Depending on the policy you choose, you may qualify if you’re unable to work in any position, or if you’re unable to work in your primary position. 

Long-Term vs. Short-Term Disability

Note that long-term disability insurance and short-term disability insurance are two separate policies, designed to complement each other. Short-term disability insurance doesn’t have a waiting period. It kicks in faster, and pays a higher percentage of your salary, but it also only lasts for a short period of time (usually 3 to 6 months). 

By contrast, long-term disability insurance can last for years. Most policies have a maximum payout period, with some policies lasting for 10 years, others lasting just a few years, and still others lasting until you turn 65. 

Generally speaking, long-term disability insurance is more important. If you’re able to save up an emergency fund to cover 3 to 6 months’ worth of expenses, you may be able to forgo short-term disability insurance entirely. It’s much harder to save up enough money to compensate for a long-term disability; you’d have to be on the verge of retirement to no longer need a stream of income to sustain yourself. 

Purchase Availability

There are many ways to purchase long-term disability insurance. In some cases, you may be able to purchase sponsored long-term disability insurance through your employer. In these scenarios, your employer will likely pay some or all of your insurance premiums on your behalf, as an employee benefit. However, you’ll have little choice in the details of the policy. 

You may also purchase long-term disability insurance as an individual. If this is the case, you’ll be able to shop around with multiple providers, get quotes for a variety of different policies, and choose the policy and provider that make the most sense for you. 

Typical Benefits

Payouts vary depending on the premiums paid, the nature of the disability, and other factors. However, in most cases, you can count on receiving between 40 and 60 percent of your paycheck with a long-term disability insurance policy. If you were making $50,000 per year before your disability, that would translate to annual payouts of between $20,000 and $30,000 per year. 

Typical Costs

The costs of a long-term disability insurance policy will vary tremendously based on your age, health, your current occupation, and other factors that may influence your chances of becoming disabled. Additionally, policies with a higher payout tend to carry a higher premium. That said, most people can count on paying between 1 and 3 percent of their annual salary for a long-term disability insurance policy. If you’re making $50,000 per year, that amounts to $500 to $1,500 per year. For $20,000 to $30,000 per year of potential coverage, this is favorable for most people. 

Your Risk Profile (and Other Variables) 

The value of a long-term disability insurance policy will depend heavily on your individual circumstances. For example, if you have a high risk profile, you may face higher premiums, but you’ll also be in greater need of coverage. If you’re nearing retirement, the prospect of losing your ability to work may not be that scary.

Is It Worth It? 

The bottom line is that for most people, long-term disability insurance is well worth the money. Paying a tiny fraction of your annual salary in exchange for substantial protection in the event of a debilitating injury is a fair trade. That said, long-term disability insurance isn’t ideal for all people in all situations, and you should always do your research and get multiple quotes before finalizing your decision.