Long-term disability insurance is one of those financial instruments that most people should have, yet few people do. It’s designed to pay you in the event that you become so injured or ill that you can no longer work. How much you’ll get will depend on the type of policy you have (generally sixty to eighty percent of your salary), but the point of having this insurance is to guarantee you a source of income should you become unable to work.
Now, for most people, a standard disability insurance policy is fine. These policies will pay a portion of your salary, but some (usually the less expensive options) require that you work if you are at all able. For example, maybe you can no longer do the heavy lifting you used to do in construction, but you’re able to work in the office answering phones. After six months of paying you your full benefit, your insurance may insist that you go back to work doing anything you are able to do. It would then pay you the difference between your new salary and the agreed upon limit of coverage.
For many of us, this is an acceptable trade-off. However, if you have a very specialized occupation, it may not be. Imagine that you are a neurosurgeon, professional athlete, lawyer, or some other highly paid professional and now you can’t do the work you used to do. Some disability policies will say, “Tough luck. You can still work, so go get that job at Wal-Mart and we’ll pay you prorated benefits.” Others will be a little more generous and say, “Well, you can’t do your old job right now, so we’ll give you full benefits for a while and see how it goes. If you still can’t resume your occupation after a few years, we’ll tell you to go get that Wal-Mart job and we’ll pay the prorated benefits.”
If this isn’t something you’re willing to settle for, you need to look into a disability policy that will pay you the full benefit if you cannot do your old job ever again, regardless of whether you can do any other type of work. Of course, these are the most expensive policies to get, so you have to weigh the positives against the negatives. Are you willing to pay much higher premiums over the years to ensure that you won’t have to work at any job other than the one you currently do, or would you rather pay lower premiums but have to do some type of work (even if it’s “menial” to you) to earn your benefits? Which type of policy to get depends on how specialized your occupation is, how much you’re earning, and how much time and money you’ve spent in achieving your success.
For example, if you are a neurosurgeon and you develop rheumatoid arthritis that affects your hands, your career is probably over. However, you’ve spent a lot of time and money achieving your level of success and your income likely can’t be replaced by any other work that you can do. Even the best office job is no substitute for the income of a top doctor. In this case, you would want a policy that pays you the full benefit for life, regardless of what other work you can do. Otherwise, you’ll have to take a job well below your pay and skill level and you still will only receive a partial benefit from your insurance company.
If you’re like most of us “regular Joe’s” and your skills translate to several types of office work or you can easily transition from a physical job to an office job by taking a few classes, you don’t need as much protection for your occupation. In this case, a policy that simply buys you time to get back to meaningful work is best because you’ll probably be able to earn your old income within a few years. At worst, you’ll have to take on some sort of part-time work in order to keep receiving benefits.
If, however, you have a lot invested in your occupation and you know you won’t be able to replace the work or the income, you might want a policy that will pay you a full benefit without requiring you to “settle” for a lower wage/skill job. The bottom line is to understand exactly what your disability policy will cover, how long they’ll pay you, and what, if anything you’ll have to do to keep receiving benefits. Then you can decide what you’re willing to pay for.
(Photo courtesy of tedeytan)