A guide to understanding long-term disability insurance

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Many of us do not always recognize the potential danger of becoming permanently disabled. The U.S. Census says that you have about a 1 out of 5 chance of becoming disabled for at least some period of time. The average duration for a long term disability (LTD) is about a two-and-a-half-year absence from employment. Long Term Disability is a vital component in a financial plan to help mitigate that risk. It is also important to understand some of the basic features of long term disability insurance before purchasing a policy.

What is Long Term Disability Insurance? This type of insurance is fairly basic to understand. LTD picks up where your short-term coverage ends. Short term coverage will typically cover you for a period of about 3-6 months. If you are deemed to be long term disabled, most policies will typically cover replacing up to 50-60% of your prior income, with certain limitations. While 60% seems like a substantial reduction in income and insufficient to maintain most people's current lifestyle, it is certainly better than no income. Benefits, when approved from a LTD policy, will typically not be paid beyond the age of 65.

How do you buy Long-Term Disability Insurance? One of the most common ways is through a group plan with your employer. In fact a large number of employers provide LTD insurance for free as benefit for their employees. In such cases, it may make sense to buy additional supplemental insurance policy to bring the replacement value of your income closer to 100%. The cost of LTD insurance as part of a group plan is, like most group policies, often less expensive than purchasing this coverage privately.

However, there are some serious considerations that you should think about before buying a policy as part of a group plan. One such consideration is qualifying for benefits. Assuming that you are legitimately disabled and file for benefits, this does not mean the insurance company will approve the claim. Unlike life insurance where death is not debatable, a disability can be, and often is, disputed. In an event where you end up in a dispute over eligibility with an insurance company, this can be a long exhausting process with an employer-provided plan. The reason is that group insurance is regulated under the Employee Retirement Income Savings Act (ERISA). If you feel you are not receiving the benefits that you are entitled to, you may wish you take legal action against the insurer. In such an event under a group plan, this is a matter of federal law. According to ERISA, before there can be a federal lawsuit you must first " exhaust all administrative remedies ". This means you have 180 days to appeal a denial and then the insurance company can wait another 90 days to respond. While this process plays out, you are potentially without income as you're unable to work.  Furthermore under ERISA, the insurance company has what is known as discretion to administer their own policies . This means you must be able to demonstrate that the insurer abused their discretion. Most attorneys with expertise in the field of disability claims will tell you that this is a fairly tough standard to meet.


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This article was originally published on MarketIntelligeneCenter.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: personal finance , insurance

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