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The basics of long-term disability insurance

You might think your risk of becoming disabled is nil, unless you have a dangerous job or you’re a daredevil on weekends.

But about one in four of today’s 20-year-olds have a chance of becoming disabled sometime before they retire. The average long-term disability absence from work lasts 34.6 months – almost three years, according to the Council for Disability Awareness. That's a long time to survive without a steady income.

Musculoskeletal and connective tissue disorders -- including neck and back pain, joint, muscle and tendon disorders and foot, ankle and hand disorders -- were the leading cause of new long-term disability claims in 2013, according to the council’s review of claims data. Cancer ranked second among the primary causes.

long-term disability explainedA disability can strip you of your ability to make a living. While some people can tap into their savings to get by without working for a few months, few people can afford to stop working altogether for a longer period of time.

That's where long-term disability insurance can help. Long-term disability policies provide you with income for an extended period. Most people who have long-term disability insurance get it through their employers, although you can buy individual long-term disability insurance on your own.

Long-term disability insurance explained

Long-term disability coverage picks up where short-term disability insurance leaves off. See these basics of short-term disability insurance for an overview.

Once the short-term benefits expire (generally after three to six months), long-term disability insurance pays a percentage of your salary, usually 50 to 60 percent, depending on the policy. The benefits last until you can go back to work or for the number of years stated in the policy.

Some policies pay out as long as you are disabled until age 65. The average annual premium for a new group long-term disability policy in 2013 was $226 per person, according to Gen Re’s “2013 U.S. Group Disability and Group Term Life Market Survey.”

If you pay your own premiums with after-tax dollars, your disability benefits will be tax-free. If your employer pays for the policy, most likely with pre-tax dollars, you’ll have to pay income taxes on the benefits.

Most disability insurers will work with employers to help you return to work as quickly and safely as possible. While disability insurers want to see people healthy and rehabilitated, they also save money if a claimant quickly returns to work.

You'll most likely find your disability insurer managing the claim if you are "partially disabled" -- meaning you can still work but only in a job that pays substantially less. In cases where you’re only able to earn less than 20 percent of what you previously made, you’ll likely get full disability benefits that are based on your pre-disability income.

For example, if you worked in a warehouse and earned $40,000 annually, then hurt your back and had to take a part-time desk job that paid less than $8,000 a year, your long-term disability policy likely would pay you full benefits based on your pre-disability wages of $40,000. If the full benefit was 60 percent, you would get 60 percent of $40,000, or $24,000.

If, however, you were able to earn between 20 and 80 percent of your pre-disability income, you’d get a proportionate amount of income based on the percent you could earn. If you can earn more than 80 percent of your pre-disability income, most insurers do not consider you disabled.

Causes of new long-term disability claims

•   Musculoskeletal/connective tissue disorders: 28.6 percent

•   Cancer: 15.1 percent

•   Injuries and poisoning: 10.3 percent

•   Cardiovascular/circulatory: 8.7 percent

•   Mental disorders: 8.3 percent

•   Nervous system-related: 7.7 percent

•   Pregnancy and childbirth complications: 5.9 percent

•   Other: 15.4 percent

Source: 2014 Council for Disability Awareness Long-Term Disability Claims Review, based on 2013 claims.

A few insurers offer a dependent care reimbursement benefit, meaning they also reimburse the employee for child care expenses if the employee's spouse must go back to work as a result of the disability.

If you become disabled and begin receiving benefits, you will no longer have to pay premiums. Most policies contain a "waiver of premium" provision that states you can stop paying premiums if you are disabled for 90 days or longer.

Buying individual disability insurance

If your employer does not offer group disability insurance, or if you think your group policy does not provide adequate coverage, you may want to consider buying an individual long-term disability policy. You can buy this through financial planners, the same agents who sell you life insurance or annuities, or sometimes through your mortgage company.

Most policies are sold on a "non-cancellable" or a "guaranteed renewable" basis, according to the Insurance Information Institute (III). With a non-cancellable policy (which requires an initial medical exam), the insurer cannot cancel the coverage or raise your premiums. If you buy a policy on a guaranteed renewable basis, the insurer cannot cancel the coverage as long as you pay premiums, but it can raise rates on a class or group of insured people who have the same policy, work at the same place or share another, non-risk-associated characteristic.

According to the III, most individual policies also have features that allow benefits to keep pace with inflation or gradual salary increases, such as a cost of living adjustment, which adds a percentage to your benefit each year.

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