Top 5 Causes for Long-Term Disability Claims³

1. Musculoskeletal Disorders account for 29% of long-term disability claims.  These include disorders affecting the back, spine, knees, hips, shoulders, etc.

2. Cancer is 15% of long-term disability claims

3. Pregnancy and complications account for 9.4% of long-term disability claims

4. Mental and Nervous disorders, such as anxiety, depression, bipolar disorder, etc., are 9.1% of long-term disability claims

5. Injuries account for 9% of all long-term disability claims

You probably can think of someone you know – or maybe even more than just one - who has experienced one of these disorders or injuries while in their working years. While we do not want to think about ourselves as ill or injured, the reality is that it can happen to someone we know. It can also happen to us.

Alternative to Your Paycheck

Savings

The average disability lasts 34.6 months.⁵  That is just under three years.  Could you take three years off from work and still pay your bills from your savings?  Just about 50% of Americans, in a 2018 survey, said they do not have enough savings to cover more than three months of their current bills, and some even admitted they would not even be able to cover a $400 emergency without needing a loan or selling something⁶.  But if you are a good saver, how long would your savings last if you could not earn a paycheck?  Given the average American income and average expenses, saving 5% of your income for ten years would be gone after about six months if you had to use it to pay your bills and living expenses.  It is safe to say that no matter how much you try to save, it would not be adequate to cover all your bills during a long-term illness or injury.

Worker’s Compensation

Your employer may be legally required to cover all their employees under a Worker’s Compensation plan.  However, this plan may not cover you if you are self-employed or an employer.  Even if you are an employee covered by such a plan, most illnesses and injuries do NOT occur at the workplace or due to the workplace. Therefore, workers' compensation would not cover this event.

Loans

How long and how much would your family or friends be willing to give you to help out with your bills if you were sick or injured and could not work?  Recognizing that more than half of Americans cannot even cover their bills if they cannot work for more than 90 days, your friends and family probably do not have the funds to offer, even if they wanted to help, or at least not for very long.  Would a bank approve you for a loan without being actively at work?  Most likely not.

Group or Employer-Sponsored Long-Term Disability Plans

Some employers offer Group Long Term Disability (Group LTD) as a part of their benefits packages.  But how much do you know about that plan?  If the employer offers it as a “free” benefit, where they pay your premiums.  However, if you do collect under the policy, you must pay taxes on any benefits you receive.  The typical group LTD covers 60 or 66 2/3 of your typical monthly income.  Once you pay the taxes on that benefit, you are only bringing home 40% of your income.  If you are a highly compensated employee, the plan monthly maximum may even further reduce the monthly amount you receive and still need to pay taxes on, or some of your compensation may not be considered in the formula, such as bonuses, commissions, stock purchases, etc.

Individual Disability Insurance Policy

This is the best, most secure option for protecting your paycheck if you are sick or injured and cannot work.  You are paying your premiums for this coverage; therefore, the benefits are tax-free. You can purchase an individual disability insurance policy covering 40-65% of your income.  But remember, it will be a tax-free benefit if you collect, so you will bring home closer to 70-80% of the normal after-tax paycheck you were used to.  Even if you do have group LTD through your employer, you may be eligible for a smaller individual policy above what the group plan pays to bridge that gap between what the group benefit looks like after you pay taxes and what the paycheck you bring home looks like. 
     
¹ Social Security Administration Fact Sheet

² Commissioner’s Disability Insurance Tables A and C, assuming equal weights by gender and occupation class

³ Integrated Benefits Institute, Health and Productivity Benchmarking 2019 (released September 2020), Long-Term Disability, All Employers. Condition-specific results. https://files.ibiweb.org/uploads/general/Sample-Reports.zip

⁴ David U. Himmelstein, Robert M. Lawless, Deborah Thorne, Pamela Foohey, Steffie Woolhandler, “Medical Bankruptcy: Still Common Despite the Affordable Care Act,” American Journal of Public Health 109, no. 3 (March 1, 2019): pp. 431 – 433. See Table 1. Free access available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6366487/

⁵ Council for Disability Awareness, The Average Duration of Long-Term Disability is 31.2 Months (Jan. 2016), https://blog. disabilitycanhappen.org/the-average-duration-of-long-term-disability-is-31-2-months

⁶ Federal reserve, “Money in the Bank? Assessing Families’ Liquid Savings using the Survey of Consumer Finance,” FEDS Notes, November 19, 2018, https://www.federalreserve.gov/econres/notes/feds-notes/assessing-families-liquid-savings-using-the-survey-of-consumer-finances-20181119.htm, Table 1.