Tips for Buying a Long Term Disability (LTD) Insurance Policy

I’m in the midst of what may be the world’s longest search for long term disability (LTD) insurance. I’ve been thinking about this for months and, though I have coverage through work, I made picking up a individual LTD policy one of my goals for 2008. Unfortunately, I’ve made virtually no progress on this.

Over the weekend I started digging around for information again, and I ran across a nice compilation of tips courtesy of the Federal Citizen Information Center — you know, the good folks in Pueblo, CO.

Here goes…

Examine how the policy defines disability. Some policies only pay if you can’t work in any occupation, whereas others pay if you can’t work in your own occupation. The latter is obviously better.

Ask for outlines of coverage so you can compare across policies. Compare the definition of disability (above), benefit amount, length of waiting period, length of benefit period, benefits for partial disability, cost-of-living adjustments, etc.

Check that the company and agent are licensed in your state. If you’re unsure, contact your state’s insurance department.

Look for a company that is reputable and financially strong. Ratings agencies include:

» A.M. Best Company
» Standard & Poor’s Insurance Rating Services
» Duff & Phelps, Inc.
» Moody’s Investor Services

Fill out your application accurately. Don’t withhold information or lie about your health. The insurer might refuse to honor your policy if you’re dishonest or provide incomplete information.

Read your policy carefully. Once you know what you want/need, it’s important to make sure that the policy that you’re considering offers the sort of coverage that you’re looking for.

Shop around and compare costs. LTD insurance is typically sold individually through insurance agents, or through group policies which may be available from your employer or professional organizations. Costs and coverage levels vary.

Finally, when you decide to purchase a policy, make your check payable to the insurance company and get proof of payment. Also be sure to check the date that the insurance becomes effective.

In addition to these tips, you might be interested in the CIC’s handy LTD insurance checklist.

6 Responses to “Tips for Buying a Long Term Disability (LTD) Insurance Policy”

  1. I\’m considering buying long term disability insurance, but I\’m not really familiar with how it works. I like how you suggest to read your policy carefully once you know what you need and want. I should probably figure out what I need before I do that so I make sure I\’m covered for the future.

  2. Anonymous

    Good advice. Here are some FACTS about Disabilities:

    • Odds of a disability are nearly 3 times greater than death between the ages of 25-65
    • At age 37, the odds of becoming disabled are 3-1/2 times higher than that of death
    • 1 in 3 Americans age 35 to 65 will suffer a disability lasting at least 90 days
    • 48% of all home mortgage foreclosures are due to a disability – only 3% are due to a death of the breadwinner
    • 1 in 4 families that filed for bankruptcy protection identified an illness or injury in their family as the major reason for the bankruptcy

    Despite all this, amazingly, 82 percent of Americans have little or no disability coverage.

  3. Anonymous

    Your best bet may be to start with your employer. LTD coverage is very inexpensive and HR departments usually have consultants/brokers that can price alternative plan designs very quickly.

    A couple of things to look into on your company plan.
    1. What is the monthly benefit cap? LTD plans will cap the monthly benefit typically at around $10,000. So, if the policy pays out 60% and you make more than $200,000, the coverage is less than 60%.
    2. What is the definition of disabilty? Is it own occupation or any occupation? Furthermore, if it is own occupation how long does that definition apply. Many policies will have a own occupation definition that last for the first 24-36 months of disability and then switches to an any occupation definition. The best policies offer own occupation definition for the full duration of the disabilty.
    3. Is there a partial disability benefit? Typically, an individual will slowly deteriorate into a disability. It more the exception that an individual is healthy one day and then completely disabled the next day. It is important to understand if your policy will provide a benefit during this time period.

    Having said that, there are a couple of things that you can ask your employer for in order to enhance your benefit.
    1. You can ask your employer if you can switch to a “gross-up” method of premium payment. Under this arrangement, an employer will gross-up your salary by the LTD premium amount, take out any necessary tax and then pay the premium from your paycheck. As a result, you have in effect paid for the policy after-tax. The advantage to this arrangement is that any benefit payments are non-taxable. A great product for this is offered by UNUM. Its called Tax Choice and it allows employees to choose whether to the employer pays pre-tax or the employee pays by the gross-up method.
    2. Ask the employer if they are willing to up the benefit to 66.6%
    3. Ask the employer to look into optional LTD buy-up plans
    Hope this helps.

  4. Anonymous

    @ Tanya:

    I agree. My best advice here is to join a professional organization of some kind if you can. I joined the American Society of Mechanical Engineers (ASME) solely for their unbelievably good rates on long term disability insurance. Even having to pay the $80 membership fee each year puts me way ahead of where I would be with non-group insurance.

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