Thoughts on Long Term Disability Insurance

I’ve always subscribed to the notion that you should insure that which you cannot afford. Thus, we’ve been very good about doing things like keeping our life insurance coverage up to date and otherwise protecting our assets. Recently, however, I’ve been thinking more and more about long term disability (LTD) insurance as I’m concerned that we don’t have enough.

First, a bit of backstory… We have four young children, and my wife stays at home with them. Thus, I’m currently the sole source of financial support for our family. I have decent LTD coverage through work, but it really wouldn’t be enough to comfortably support us if I were disabled for a long period of time…

There’s a 60 day waiting, at which point the LTD coverage kicks in and replaces up to 60% of my salary. So if I’m not eligible for Social Security disability payments, the insurance will pay 60% of my income. But if I am eligible for other benefits, the insurance will top us off to provide a total of 60% income replacement.

The good thing about about this coverage is that it’s cheap, and it’s a good start. The bad thing is that it, like I said above, I’m the sole source of financial support for our family, and this coverage would leave us well short of a comfortable lifestyle if I were out of commission for an extended period of time. Moreover, it only applies to my “regular” income, and thus wouldn’t help make up the additional shortfall if my self-employment were adversely impacted.

So… I’m in the market for a supplemental LTD policy. Unfortunately, I know very little about what to look for, how much I can expect to pay, etc. Thus, this will be a major learning experience for me.

One interesting tidbit that I’ve run across thus far is that, because my employer-provided LTD is paid out of pre-tax dollars, the LTD income replacement will be taxable (further diminishing the value of 60% income replacement). In contrast, private policies are paid out of your pocket (with post-tax dollars) and the benefits are typically tax free.

21 Responses to “Thoughts on Long Term Disability Insurance”

  1. Anonymous

    I take issue with your article about disability insurance due to my first hand experience with this subject.

    I went to work full time after leaving home at the age of 16. I worked in labor all my life. Because of the physically demanding work I have done, I have always carried long term disability (LTD) policies on myself. For the last 15 years of my work history I had one the highest ranked insurers, The Hartford, through my work.

    Every open enrollment I was assured by The Hartford of their steadfast dependability of always being there for you in your time of need. I had a policy that covered my specialty and I felt protected by the rhetoric that they feed me.

    After becoming totally disabled at the age of 58. I learned what it was really like to be covered by one of these policies.

    So here are some examples of the things they don’t tell you about these policies.

    Though I had a policy that specifically covered my job title. The Hartford compelled me to apply for Social Security benefit. Not doing so would cause my claim to be closed. Since I had my primary physician and 2 specialist all agreeing that I was disabled. I applied for SS on my own and was immediately qualified for benefits. SS agreed that I was totally disabled. My SS checks were made retroactive to my disability date.

    The Hartford immediately demanded thousands of dollars in reimbursements in what they now determined were “over payments”. The Hartford garnished 66% of my benefit because of me qualifying for SS disability payments.

    It was at this time that The Hartford began asking me repeatedly for “more information” on my claim. I would send them every scrap of information, every doctor’s report I had only to have The Hartford say they needed more information.

    The Hartford contacted all 3 of my doctors requesting that they send more information and fill out forms from The Hartford which duplicated that information. It was the same forms over and over again.

    The Hartford frequently sent me letters stating that my doctors were not sending them the required information. Therefore The Hartford was going to close my claim. I would contact the doctors and they showed me fax reports proving that they did send the information. I asked The Hartford to provide me a copy of my case file so I could determine what information was missing. The Hartford refused to give me a copy of my own case file saying that it didn’t belong to me.

    One day I got a call from a “rehabilitation specialist” saying that they were going to rehabilitate me and get me back to work. I only wish that this could be true because my multiple health problems are all permanent and progressive. I asked the specialist how many people with my diseases that she had successfully rehabilitated. The lady went mental on me yelling at me for daring to ask her qualifications. I asked her if she had one success story of rehabilitation of a patient with my disabilities. The lady said she couldn’t answer that question due to HIPPA laws. I told her I was not asking for a patient’s name, birth date, SS number, MR number or any information that could identify this patient. The lady became very irate with me, claimed I was being uncooperative and hung up on me never answering one of my questions.

    My checks were immediately stopped. No letter of explanation, no phone call, nothing to inform me why.

    I ended up calling a supervisor and asked him to explain to me what happened. He claimed it was all a misunderstanding and reinstated my checks.

    Afterwards, the demands for “more information” increased to the point where my doctors were refusing to repeatedly fill out the same forms.

    Then something interesting happened. I had my 2 year anniversary of being on LTD payments. Remember that I said that I had a policy that covers my specific job. Well after 2 years the definition of “totally disabled” changes from your specific job to ANY job what-so-ever.

    I didn’t stress over this point much because I had 3 doctors and SS all agreeing that I was totally disabled. But here are where things get strange. Because my employer partially paid for this policy. The policy falls under the “Employee Retirement Income Security Act” (ERISA) which is a federal law.

    The effect of this becomes apparent when I asked “The Hartford” to define what they consider “totally disabled” to be. Their answer was, whatever we say it means. When looking at ERISA law you quickly realize that these laws were written by the insurance companies themselves. Lobbyist are a very effective tool.

    So here I am at my 2 year anniversary and my claim has been “closed”. My only recourse is to appeal the decision (which will take a lawyer). Because this will eventually end up in federal court here is what I can sue for. Reinstatement of my checks, that’s it! Can I sue for damages for being denied in bad faith? No! Can I sue for attorney fees? No! Can I sue for a one time settlement? No! What are my attorney fees? Over $22,000.00. The bottom line here is that The Hartford has nothing to lose at all by denying my claim for whatever reason.

    So here’s a recap of the “protection” that The Hartford has given me. Loss of my ability to work resulted in me loosing 33% of my income. After qualifying for SS The Hartford reduced my payments another 66%. My lawyer will end up taking another 33% of any checks that are reinstated. I will be left with almost nothing in return with no hope of any penalty towards The Hartford.

    I should have placed these years of insurance premiums into my retirement accounts.

    The Hartford has in effect, taken my money and run off with it.

  2. Anonymous

    Don’t get Great West Life (i’m sure all insurance companies are the same but know firsthand Great West Life….they are not Great at all)

    They will find any way to not pay you. I gave them doctor notes on top of doctor notes. As a matter of fact, so many doctor notes that my doctor refused to sign anymore….because as my doctor said “they know your condition already and i can’t spend my day writing reports for you. You are not my only patient.

    Got a letter saying that my long term disability was approved. While waiting for doctors appointments, MRI, ultrasound etc. they kept phoning everyday…what’s going on, why aren’t you at a doctor, if they couldn’t reach me they accused me of being fine and being out somewhere.

    While waiting for surgery, not so great west life called me to tell me my disability would be terminated…because i was well enough (according to their doctors…who had never seen me) i was well enough to work. Now, my workplace had no work that i could do…you know what they told me? I could work at another company on light duties and if i’m able to work at another company….then i don’t need disability payments. Now how the heck do i get a job at another company saying i’m on light duties and waiting for surgery appointment? Then quit and go back to my regular job? I even went to another surgeon to get my appointment for surgery moved up…but horrible west life said no…you are terminated. Don’t…i repeat…don’t get Great West Life

  3. Anonymous

    Just to add to what everyone else has written, even if you do qualify for SSDI (social security disability), which I and many others do, the long term disability companies will try to find any and every reason not to pay you, especially if the policy is obtained through your employer and governed by the federal statute ERISA, which, among other things, has been found by the courts to completely preempt state courts and therefore preclude any claims for bad faith. The insurance companies have used this leeway to essentially harass and wrongfully terminate many thousands of disabled claimants and weed out those who, while truly disabled, do not have the financial, physical and/or emotional resources to fight for what sometimes ends up being years before obtaining or reinstating benefits. Utilize your disability benefits if you really have to, and fight for them and for changes in the law, but try to save money and have other resources because it is not always something you can count on. It is a brutal reality that I wish more people knew about so that those of us living this nightmare might someday see it changed. (Sorry to ramble).

  4. Anonymous

    This is so ironic, just today I was planning on getting LTD.
    I am sooo confused though. I do not pay into Social Security, so my union just “recommends” companies.

  5. Anonymous

    Is there a way to claim taxes so that pre-tax dollars for LTD premiums will not be taxed. Should your company be required to give you the option of pre or post taxed premiums?

  6. Anonymous

    Hugh, you just validated what I said in my post above. So many news articles and financial planners urge everyone to get one of these plans, but I doubt any of them actually read such policies, and thus count the “holes” in the swiss cheese. Bottom line to most (I suspect) LTD policies: you don’t get bupkus unless you qualify for social security disability payments, and that basically means you can’t do ANY job. For the Social Security definition:

  7. Anonymous

    Watch yourself!!I was recently diagnosed with Multiple Sclerosis.My company has a clause in our policy that states if you become ill,that it has to prevent you from “doing” any job!So,for instance,you would have to be confined to a bed!
    Otherwise,you would not be eligible,Great West Life and companies like them are doing this to get out of paying for actual long term and chronic illnesses.How many of us actually look over our companies LTD policy or understand it!

  8. Anonymous

    At some employers, you are permitted to pay your portion of long-term disability insurance premiums post-tax. Doing so means a portion (the formula is based on how much of the premiums you paid pre-tax vs. post-tax) of any benefit is not taxable. As you know 60% of your salary post-tax is not a major financial hit compared to 100% of your salary pre-tax (especially so if you live in a high-tax state.)

  9. Anonymous

    My husband had two or three LTD policies when he was disabled in 1994. He was 51 years old. One paid for life and one until he was 65, they started paying after 6 months. His company paid him commissions for that long. The policies paid $3,500. a month after that. With SSD and his health insurance and after two years, Medicare we had enough to live on and I didn’t have to worry about taking care of him and working full time. He lived another 5 and a half years. I was so very thankful that he had LTD insurance. I would advise you to get as much as you can. SS disability doesn’t pay enough to live on without another source of income in addition to it. It is expensive insurance but worth every penny if you need it. He was left a quadraplegic after getting a neuralogical disease. You never know what can happen in the future and it is best to be prepared for a possible disibility.

  10. Anonymous

    Thanks guys, I’ve been wondering what to write about, LTD it is.

    LTD has gotten more expensive and more resrictive in the past 5-10 years ’cause people are USING it much more than they ever did. Back in the day, companies were more liberal with sick time and allowed employees to roll it over; then if after 20 years you needed surgery, you could use time off as needed. Now-a-days find three things wrong with the last sentence.

    Find a agent that writes through several companies. Control the premium on a LTD policy by taking a higher deductible (the waiting period, tying this in with your emergency fund) and the length of the policy (usually two years..after which you’re eligable for social security disability); make sure the agent explains the restrictions and provisions of the policy. Good luck.

  11. Anonymous

    I am also pretty sketched out by disability insurance. It sounds like a really good idea and necessary evil in theory, but I have NEVER heard of a LTD policy that didn’t have a ton of exceptions and ways to delay and deny claims, even on the expensive policies. No one I know who has used it has ever had a good experience and some people have even had to take the insurance company to court. It seems like it’s really safer to save up an extra large emergency fund for this reason, especially because it’s pretty expensive.

    What good does it do you if it takes a couple months to kick in, excludes a bunch of stuff, and doesn’t even end up paying enough to cover your basic bills if you do in fact actually receive the benefit?

  12. Anonymous

    I work in the federal court system, where an LTD plan was offered — through a third-party insurance company — and it cost me (via paycheck deductions) about $800/year at the time (about 8 years ago). Then one day I asked to read the policy and found it odd that the insurer dragged its feet in sending me a policy, as opposed to a plan summary booklet.

    When I got the policy, it took me an hour to figure out that all the insurer was going to pay was a marginal amount of money because it excluded any Social Security Disability payments and — get this — it wouldn’t pay me anything unless I first qualified for SSD incapacity-wise (hence, you wind up having a claim with the insurer only if you’re so disabled that you actually qualify for SSD, and that’s REALLY disabled!).

    Worse, the policy would also exclude “FERS” payments (basically a federal employee retirement plan that will start paying early if you’re effectively retired by an SSD-level disability) and any other third-party sources of income (unemployment, money from the person who rammed you with their car and thus disabled you, for example).

    To be clear: The policy permitted the insurer to add all of those layers of payments together, then subtract the total from the 60% of income that it offered to replace. I figured that I would have wound up with just a marginal layer of economic benefit for my $800. I actually got one of the insurer’s lawyers on the phone to confirm all this and he agreed that it wasn’t a good deal.

    On top of all that, the policy was hard to read — and I’m a lawyer!

    My point: read the policy thoroughly, especially (1) it’s definition of how disabled you must be to get any payments at all; and (2) how much of other income, be it from SSD or welfare, an employer-benefit, etc, is excluded. Then ask yourself if you would pay $800/year, for example, for $10,000/year worth of coverage (I pay that much for $1 million of auto liability coverage, though I concede that LTD is a different animal).

    Anyway, I’m convinced that very few people read these policies (right, it doesn’t benefit insurers to make them easy to read), and I see plenty of lawyers get rich when disappointed insureds sue their insurers over the holes cut into the Swiss cheese — precisely what some of these policies are.

  13. FIP: If you’re single with no kids and if your employer offers a policy, then you may have all that you need. Because of my situation, I don’t want my wife to be forced back to work before our family would otherwise be ready, so I’m in a fundamentally different position.

  14. Anonymous

    I definitely know what you’re feeling, I’m quite young (22), so I haven’t really thought about long term disability yet. Dave Ramsey constantly spouts the stat that you’re 6 times more likely to be permanently disabled than die before 65, so it’s probably something to get done one of these days. I hear it’s relatively cheap to do, especially if you’re in an office environment.

  15. Anonymous

    Jon is right. It is difficult to get coverage for more than 60% of your income. The insurance company wants to make sure you don’t milk the insurance companies by faking a disability.

    You may be able to get a supplemental policy like Aflac, but I bet it will be difficult to get another disability policy. Or, the cost will be very prohibitive. You may be better off building a larger emergency fund – like 12 months. If you need more than 60% of your pay and 12 months of emergency monies, then you are probably suffering a very severe disability and social security should kick in.

  16. Anonymous

    Good luck with that. Usually the highest you will find is 60-80 percent of gross earnings. The thought behind that being to prevent overinsurance and to reduce moral hazard and malingering. Can’t help you on costs though. Just shop around and read the policies.

  17. Anonymous

    My employer provides LTD … but advised me that most people who go on it are terminated. Don’t know if that’s something you would have to deal with, but if so, it could play a significant role in your decision-making…

  18. Anonymous

    I got LT disability about year ago. I’m very happy with the decision. Wish I did it sooner because I have pinched nerve and as a result my policy doesn’t cover my spine which really sucks.

    The other thing about getting LT outside of the company is the taxation of the benefits. Most of the time LT disability is paid pre-tax by the company and as a result the benefits are taxable. If you buy LT disability with after tax dollars the benefit is not taxable which I think is a worthwhile tradeoff.

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