Disability Coverage

“It won’t happen to me.” Maybe that sentiment explains consumers’ attitude toward long-term disability insurance, which pays a portion of your income if you are unable to work.

Sixty-five percent of respondents surveyed this year by LIMRA, an association of financial services and insurance companies, said that most people need disability insurance. But the figure shrank to 48 percent when people were asked if they believe they personally need it. The proportion shriveled to 20 percent when people were asked if they actually have disability insurance.

As the annual benefits enrollment season gets underway at many companies, disability coverage may be one option worth your attention.

Some employers may be asking you to pay a bigger share or even the full cost. That can have a hidden advantage later, if you use the policy. Or you may find that your employer has automatically enrolled you — or plans to — unless you opt out. A growing number of employers are going that route to boost coverage that they feel is in their employees’ best interests, not to mention their own, since insurers usually require a minimum level of employee participation in order to offer a plan.

Benefits consultants agree that although long-term disability coverage lacks the novelty appeal of some other benefits that companies are offering these days — hello, pet insurance — it can prove much more valuable in the long run.

“This is a really critical safety-net benefit,” said Rich Fuerstenberg, a senior partner at human resources consultant Mercer.

If you become disabled because of accident, injury or illness, long-term disability insurance typically pays 50 to 60 percent of your income, while you’re unable to work. The length of time the policy pays varies; some policies pay until you reach age 65.

Long-term disability generally has a waiting period of three or six months before benefits kick in. That period would be covered by short-term disability insurance, if you have it.

Many long-term disability claims are for chronic problems such as cancer and musculoskeletal conditions. According to the Council for Disability Awareness, the average duration of a claim is nearly three years — 34.6 months.

Not everyone has savings to support them through that time. When the Federal Reserve Board surveyed adults about household economics in 2015, 53 percent said they don’t have a rainy day fund that could cover them even for three months. More troubling, nearly half of respondents — 46 percent — said that faced with a hypothetical $400 emergency expense, they didn’t have the cash to cover it.

According to the Social Security Administration, 1 in 4 people who are 20 years old now will be disabled before they reach age 67.

Overall, 41 percent of employers offer long-term disability insurance, according to LIMRA, though the proportion of larger employers who offer it is generally much higher. Compared with health insurance, premiums cost a pittance — $256 annually in 2016 on average for group plans, LIMRA says. Many employers pick up the whole tab or charge workers a small amount.

However, as employers continue to shift benefit costs onto employee shoulders, long-term disability is no exception. Increasingly, they’re offering the coverage as a “voluntary” benefit, meaning employees pay the entire premium.

The upside is that if employees pay for the coverage themselves with after-tax dollars and they ever become disabled and need to use the coverage, the benefits will be tax-free.

“If an employee can choose to pay for coverage on a post-tax basis, or is paying on a voluntary basis, it’s better for them,” said Jackie Reinberg, national practice leader for absence, disability management and life at benefits consultant Willis Towers Watson.

Some employers may pay for a core basic benefit that replaces 40 or 50 percent of income and offer workers the opportunity to “buy up” to more generous income replacement of 60 or 70 percent.

Although voluntary coverage has a tax advantage, disability consultants are concerned that leaving it up to employees, especially if they’re choosing among several other voluntary coverage options like cancer insurance, critical illness coverage and yes, pet insurance, increases the odds they’ll skip buying long-term disability coverage.

“These coverages all feel the same, and if you’re going to choose one at all you tend to go with the one that’s cheapest and the one that you think you might use,” said Carol Harnett, president of the Council for Disability Awareness, a membership group of disability insurers that does education and outreach about disability issues.

Auto-enrollment can make a big difference. Employers that auto-enroll employees in voluntary long-term disability plans may get 75 percent of employees to participate, compared with 30 percent for employers that leave it completely up to workers, said Mike Simonds, CEO of disability insurer Unum US.

If you were offered long-term disability coverage when you were hired and didn’t sign up, it may be tougher to do so during the open enrollment period, said Fuerstenberg. A growing number of health plans require employees to show “evidence of insurability,” meaning they must answer a series of health-related questions before they’re approved. Some long-term disability policies may also have preexisting condition provisions that won’t pay benefits for a condition for up to a year, for example.