Long Term Disability Insurance Guide & How You Should Buy It

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  • Long Term Disability Insurance Guide & How You Should Buy It
Author: Joseph Reinke, CFA

Do you understand the importance of long term disability insurance and what it entails?

Many people don’t, but they should. Long term disability insurance provides financial protection in case an illness or injury prevents you from working for a prolonged period.

Having long term disability coverage is one of the most important and often overlooked components of managing the risk of your financial plan.

In this blog post, we will discuss everything there is to know about long term disability insurance including what it is, if you need it, terms to know such as the elimination period, and when you’d receive long term disability benefits.

Most importantly, I’m going to show you exactly how you should be buying long term disability coverage so your financial plan has the lowest risk possible for the lowest cost!

Podcast Version Of This Blog

What Is Long Term Disability Insurance?

Long term disability insurance is a policy offered by an insurance company that replaces a portion of your lost income if you become disabled and unable to work for a long period.

It helps to protect your income and financial plan by providing financial resources so that you can maintain your lifestyle in the event of a disability.

In addition to providing financial security, it can also cover associated medical costs.

Short Term vs Long Term Disability Insurance

Long term disability insurance helps people if they become very sick or hurt and can’t work for a long time.

Short term disability insurance is when a person gets money if they get sick or hurt, but only for a short time.

The big difference is that long term disability has a waiting period before the benefit period kicks in. With short term disability, you do not have to wait. As soon as you have a disability the insurance company will begin paying you.

In my opinion, short term disability is not needed for most people. If you do get it, then get it through a group disability insurance provider, i.e. most likely your employer because it is extremely cheap.

However, I never recommend buying a short term disability policy outside of your employer because you should have an emergency fund already to cover any short term needs.

What Qualifies As A Long Term Disability?

Long term disability can be both physical and mental and can mean a variety of things.

Generally speaking, a long term disability is a condition that affects the individual’s ability to maintain gainful employment for an extended period.

This includes conditions such as chronic pain, paralysis, depression, anxiety, and many other serious medical issues.

The duration of the disability can vary depending on the specific condition you are facing, but typically any condition that prevents you from working for at least three months or longer is considered long term.

In some cases, it could even be a temporary disability that requires medical intervention and rehabilitation to return to work.

For instance, if someone has an injury that requires extensive physical therapy or time off of work to heal properly, they could qualify as having a long term disability.

This type of situation could require several months or even years of recovery before the person can return to their job or perform regular daily activities.

It’s important to note that each insurance company may have different definitions of what qualifies as long term disability, so it’s best to research your insurance provider before signing up for coverage.

Do I Need Long Term Disability Insurance?

Absolutely! In my opinion, the long term disability benefits far outweigh the costs.

Long term disability insurance is one of the most overlooked portions of people’s financial plans that we see at FitBUX.

The reason it is overlooked is that an insurance agent can’t sell you a policy because based on your income you’ve hit your insured limit from an employer policy (I’ll explain this more below).

Therefore, most insurance agents make little to no money from disability insurance and do not discuss it with you.

However, as I said. It is one of the most important types of insurance you can have. It is way more important than life insurance because nobody wants to become disabled and depend on the government!

How Much Long Term Disability Coverage Do I Need?

When considering how much long term disability coverage you need, it’s important to select a policy that will provide enough coverage to replace your after-tax income if you become disabled. Financial experts typically recommend having a policy that replaces 40% to 70% of your gross annual income (I.e. Pre-tax income).

At FitBUX, we recommend having benefits that replace 70% of your gross income.

For example, if you make $10,000 a month before taxes, your policy should provide a benefit of $7,000 per month in the event of disability. It’s important to note that any payouts from these policies are tax-free.

Insurance agents and regulators have set limits for how much disability insurance any individual can be sold. This limit is generally set at between 70% and 100% of your gross annual income. This prevents agents from selling more than necessary and keeps individuals from buying too much insurance.

It is also worth noting that many employers offer disability insurance as part of an employee benefits package.

If you do have insurance through group disability plans, there may be no need to purchase additional coverage outside of what is already provided for you. However, you do need to be aware of the benefits because they might not be what you need!

The Problem With Employer Long Term Disability Insurance

When considering long term disability insurance, many people may assume they are adequately covered through their employer.

After all, it may be easy to spot the common abbreviation “LTD” listed on a paycheck and mistakenly believe you have good disability insurance coverage. Unfortunately, this is a mistake that can have dire consequences.

For starters, the typical employee seldom has an in-depth understanding of what is covered in their employer’s policy—meaning there may be serious gaps in coverage.

This is especially worrisome for those who don’t know key elements such as the difference between an own occupation vs any occupation clause; the length of an elimination period (a.k.a the waiting period); or even the benefit period.

Even more concerning is that most companies do not provide adequate coverage. For instance, some employers will only cover 40% of gross income when disability strikes, requiring employees to make up for the remaining 30% themselves. (Remember, FitBUX recommends you cover 70% of your income.)

Therefore, it’s important to be aware of how much one’s employer policy covers and what the other details entail before assuming you have a good long term disability policy.

It’s advisable to look beyond one’s paycheck and take a deeper dive into one’s policy and consider supplementing with additional coverage if necessary.

What Is The Cost Of Long Term Disability Insurance?

The cost of long term disability insurance varies widely depending on the coverage features you select in your policy.

Below, I describe four key features or benefits and how they affect the cost.

Coverage Amount

Choosing the right coverage amount for long term disability insurance is an important decision. Generally, the more coverage you buy, the higher your premiums will be. This is because policies with higher coverage amounts are more expensive to insure due to the increased potential payouts.

For instance, a policy providing coverage of $3,000 per month will be cheaper than one that pays out $6,000 monthly. Thus, it is important to consider how much coverage you need before you purchase a policy.

Own Occupation vs Any Occupation

When researching long-term disability insurance, it is important to understand the differences between Own Occupation and Any Occupation policies.

Own Occupation policies allow you to receive benefits if you are unable to do your specific occupation due to an illness or injury.

An Any Occupation policy requires that you be unable to work any job to receive benefits.

For example, if you are a surgeon and you suffer a hand injury that prevents you from performing surgery, you can no longer be a surgeon. An own occupation policy would pay out in this circumstance.

However, just because you suffered a hand injury doesn’t mean you can’t work. Therefore, if you had an any occupation policy in this example, your benefits wouldn’t be paid out.

The probability of getting hurt and not being able to do any job is drastically less than getting hurt and not being able to do your specific profession.

Therefore, any occupation policies are much cheaper than own occupation. The more specialized your profession is, the greater the cost of your own occupation disability insurance.

Elimination Period

The elimination period is a length of time from the date that you are disabled until your benefits begin to be paid.

Generally, policies have waiting periods of 30, 90, 180, or 365 days. I.e. if you have a 30-day elimination period, you would not begin receiving benefits until you had been disabled for 30 days.

A longer elimination period will result in lower costs.

It is generally recommended that you choose an elimination period that matches up with your emergency fund.

For instance, if you have saved up for a six-month emergency fund, then consider using a 180-day elimination period for your long term disability insurance policy. This will keep costs lower while still providing ample protection in case of an injury or illness.

The big item for you to be aware of: Payments you receive from your policy typically pay at the end of the month. Therefore, if you have a 90-day waiting period on your policy, then you won’t receive your first payment until day 120.

Benefit Period

The benefit period is the length of time that the benefit amount will be paid out. Policyholders typically have the option to select a 2 year, 5 year, 10 year, or up to retirement age (65 or 67) coverage period upon purchasing a policy.

The longer the coverage period, the higher the cost of the policy will be.

At FitBUX, we understand how important it is to ensure financial security and we highly recommend opting for an up-to-retirement age policy to provide maximum protection against long term disability. This way, you can rest assured that you will receive continuous coverage until retirement age regardless of injury or illness.

The Optimal Way Of Buying Long Term Disability Insurance

When it comes to buying long term disability insurance, the most beneficial way to do so is to combine coverage types. Doing so provides you with good benefits and the lowest premium.

Here, we’ll use an example of a physical therapist earning a gross monthly income of $7,000 for illustrative purposes.

The first step is to calculate how much coverage you need. FitBUX recommends 70% of your gross income. Therefore, in our physical therapist’s case, we would need coverage amounting to around $4,900 per month.

One effective way of obtaining the right amount of disability insurance is to buy two separate policies – one that provides an own occupation policy and another that provides an any occupation policy.

This is because when you’re unable to practice your chosen profession anymore due to injury or illness, at a minimum you should still be able to find employment in something that doesn’t typically require a bachelor’s degree.

On average, these jobs pay around $3,333 per month. For your any occupation policy, you’d take 70% of $3,333 which is $2,333 and that is how much coverage you need.

Then for the own occupation policy, you’d subtract the any occupation coverage from the desired coverage amount ($4,900 – $2,333) and you get the amount needed ($2,567).


Long term disability insurance is an important safety net to have in case of injury or illness. Knowing the right way to buy coverage can ensure that you get adequate protection with the lowest premium possible.

When purchasing a policy, it’s important to consider the elimination period and benefit period.

The optimal way of buying long term disability insurance is to combine coverage types by buying two separate policies – one that provides an own occupation policy and another that provides an any occupation policy.

This way, if you’re unable to practice your chosen profession anymore due to injury or illness, at a minimum you should still be able to find employment in something that doesn’t typically require a bachelor’s degree and still have sufficient coverage without having too expensive premiums.

Buying long term disability insurance doesn’t have to be difficult.

By combining coverage types and leveraging the expertise of a financial coach, you can get the right amount of protection at an affordable rate.

At FitBUX, we understand how important it is for people to feel financially secure and strive to provide our customers with personalized plans that fit their individual needs.

Sign up today for unlimited access to advanced financial planning technology and get peace of mind knowing that your future is in good hands!

Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

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