How Does Long Term Disability Insurance Work?

Life insurance ensures your loved ones will have financial support in the event of your death. Home and car insurance protects you against damage or theft. But how do you protect your ability to earn?

Life is an amazing voyage, that sometimes does not go to plan. Would you be able to support your family if you suddenly lost your ability to work due to illness or injury?

Long term disability insurance can save the day for you. It acts as an income replacement tool if one is laid up and cannot work.

Let’s take a closer look into long-term disability insurance and the process of the way it works.

What is a long term disability?

A long term disability is classified as all medical conditions that prevent you from earning a pay check. Really, any condition can qualify, provided it meets the definition of “total disability.” Keep in mind though that every insurance company may define total disability differently.

You may qualify for long term disability benefits if you:

• Have an active long term disability insurance policy
• Have a health condition that meets your insurer’s definition of disability
• File a claim for long term disability benefits with your provider

Some people think long term disability coverage starts when you sustain a serious injury in an accident and are unable to work because of it. Even though this may be true, there are many health conditions that may also allow you to receive long term disability benefits.

Here are some of the common medical conditions that can qualify for long term disability payments:

• Cancer
• Bipolar Disorder
• Chronic Fatigue Syndrome
• Crohn’s Disease
• Fibromyalgia
• Degenerative Disc Disease
• HIV/AIDS
• Multiple Sclerosis
• Lupus

This list of health conditions is not exhaustive. Qualifying medical conditions vary by policy and insurer. Before you make a long term disability claim, make sure you fully understand how your insurance company defines a long term disability.

What is long term disability insurance?

Long term disability (LTD) insurance, unlike short term disability insurance, provides a steady stream of income if you are unable to work for a longer period of time — say years, even decades — due to illness or injury.

LTD plans replace a part of your income before the disability — usually anywhere from 50% to 80% of your annual income. The benefit payments start after you survive a pre-determined survival period. For most policies, this period is 90 days. You receive benefit payments monthly and are free to spend the money however you like.

Some Canadian employers offer LTD insurance as part of their benefits program. If your employer offers one, sign up for it without hesitation as the coverage is available for free or at subsidized rates. However, there is a good chance you may still need an individual LTD policy because employee-sponsored LTD plans often do not provide adequate protection.  

While each LTD insurance plan is different, they will spell out the following information:

• The benefit information: How much benefit the insurance company will pay on a monthly basis if you are unable to work because of disability. Usually, LTD plans pay anywhere from 50-80% of your pre-disability income.
• The waiting period: This refers to the amount of time you must survive before the disability insurance benefits become payable. Generally, the elimination or survival period is 90 days for LTD plans.  
• The definition of disability: That is, how the insurer defines disability.
• The premium amount: How much disability insurance coverage will cost you on a monthly or annual basis.
• The benefit period: How long the benefits will last if you struggle with an injury or illness that prevents you from earning a paycheck.
• Exclusions: This includes health conditions that can prevent you from qualifying for long term disability benefits. For example, most LTD policies (if not all) do not cover pre-existing medical conditions.

Now let’s answer some common questions people ask about long term disability insurance.

How does long term disability insurance work?

A LTD plan works pretty much the same way as other insurance products. In return for premium payments, the insurance company promises to pay you benefits if you become injured or ill and cannot work for an extended period of time due to it.

How much does long term disability insurance pay?

The benefit amount varies from one policy to the next. Usually, the benefit amount is a percentage of your pre-disability income. Most policies replace anywhere from 50% to 80% of your income.

How much time do you have to wait before long term disability coverage kicks in?

Once you file a claim, you will likely have to wait a pre-determined period before the long term disability benefits become payable. This period is known as the waiting period, and its duration can vary from policy to policy.

In most cases, the elimination period is 90 days, but some policies may have longer (up to 365 days) or shorter elimination periods (30 or 60 days). Depending on your risk profile, some disability insurance companies may even offer you zero-waiting-period LTD insurance. However, such a plan will cost you more than a policy with a 60-day or 90-day elimination period, if other things are the same. Which is because the cost of coverage is inversely related to the duration of the elimination period.

How long does long term disability coverage last?

Long term disability insurance lasts as long as you pay the premiums. But that does not mean the disability benefits will last forever if you file a claim. Your plan’s benefit period will dictate for how long the payments will last. Some policies pay for a specific number of years (5, 10, or 20 years), while other issue monthly payments until you reach a certain age (like 65 years). The longer the benefit period, the higher the cost of coverage, assuming other things are equal.

Find the best rates

Compare quotes from Canada's top life insurance companies in no time.

Compare Rates

What does long term disability insurance cover?

Many health conditions or injuries can cause long term disability. For example, six most common reasons for filing a long term disability claim are:

• Cancer
• Arthritis
• Back pain
• Depression
• Diabetes
• Heart disease

Given the fact the scope of disabling events is so wide, the most vital factor people should consider when buying a policy is how it defines disability. Your policy’s definition of disability will decide, more than anything else, whether you qualify for/receive benefits and, if so, then how much.

Broadly speaking, long term disability plans define disability either as any occupation or own occupation.

The any occupation definition means you will be eligible for disability benefits only if your disability prevents you from working in any occupation that you are reasonably qualified for.

The own occupation, in contrast, protects your ability to work in your chosen profession. If your disability interferes with your ability to perform the main tasks of your preferred profession, you are eligible for benefits.

As you can see, the own occupation definition is more lenient than any occupation. Consequently, it is much easier to meet. For instance, a cab driver who suffers a serious hand injury is likely to qualify for benefits if his policy follows the own occupation definition. However, if he has an any occupation policy, his application may be rejected because a hand injury might not necessarily disqualify him from other jobs suitable for him.  

Do you need disability insurance?

If you earn a paycheck, you should think about putting a disability insurance plan in place. This is particularly true for those who:

• have people in their lives who depend on them for their financial well-being
• have debts, like a home loan or a student loan
• work in a high-paying occupation which will not be easy to replace (lawyers, doctors, and architects)
• are self-employed

Disability insurance is a worthy investment for most people who work (if not all).  Because without it, staying afloat for long term can prove difficult for most people if they lose their ability to work due to disability.

Long term disability insurance can save the day for you if you are suddenly unable to work for an extended period because of injury, illness, or accident.

Getting long term disability insurance

If your employer does not offer group long term disability insurance, or if the group coverage is not sufficient for your needs, consider buying an individual policy. Buying an LTD policy is no different than shopping for any other life insurance product. First, assess your needs, that is, how much coverage you will need and for how long you want to receive the disability benefits, etc. Next, collect quotes from different providers. Lastly, sign up with the insurance company that is offering you the best coverage at the lowest price.

Conclusion

Long term disability insurance provides a steady monthly income if you become ill or injured and cannot work for an extended period. Since an illness or injury can strike any of us at any time, long term disability insurance is worth considering if you earn a paycheck.

You can buy coverage through your employer (if available) or as an individual policy. Insurance experts at Dundas Life can help you assess your long term disability needs and pick a plan that is both affordable and right for you.