The Value of a Long Term Disability Insurance Contract
Even with a short duration disability claim
When insurance is being presented to individuals, the focus tends to be on “what would happen to you and your family if X happened tomorrow?” Can an accident, a disability, or even death occur very suddenly?
The answer is yes, however the odds are in an individuals favor this will not happen abruptly. It’s possible none of the above mentioned happens prematurely, and even if an income deterrent presented itself, the odds are higher when one is much older.
For this article, I am sharing a sample design of a long term disability insurance contract. I will briefly discuss some of the key provisions in the plan before we jump into the design. The focus will not be on the scenario of an early, career-ending disability—while such coverage is critical, it is a substantial cost to insurance companies and a major benefit to the insured. Instead, this article will examine the value of a long-term disability insurance policy in the case of a short-term disability occurring later in one’s career.
Who Is It For?
Disability insurance is good for those who either do not have coverage through their employer, or have coverage limitations due to income gaps. Some occupations to mention that may have these issues are business owners, , attorney’s, accountants, architects, salespeople, physicians & other medical professions.
What Is It?
A well structured long-term disability insurance policy should include:
✅ Non-cancellable, guaranteed renewable coverage – This ensures that the insurance company cannot cancel or change the terms as long as premiums are paid.
✅ Own-occupation definition – This provision allows an individual to receive benefits even if they can perform other types of work outside their original occupation.
When Does It Pay?
These plans can be 5 or 10 years worth of payments due to a disability, but can also run out to age 65, 67 and even 70. Once a claim is approved, monthly payments continue as long as the individual remains disabled.
Why Have Personal Coverage?
Employer group coverage tends to have caps on how much coverage is offered to an employee. The coverage could be taxed, increasing any potential gaps that exist. Some of the policy definitions can be in the insurance carriers favor, not the insureds. Most group plans are not portable if an individual were to leave for another job, or started their own business.
Sample Policy Design
While we are not including an actual policy illustration in this article, the following is an actual summary from a highly rated disability insurance provider:
35 Year Old Male in Good Health
State: New Hampshire
Occupation: Attorney
Monthly Tax-Free Disability Benefit: $10,000
Elimination Period: 90 Days
Benefit Payments Until: Age 65
Annual Premium: $2,289
Scenario: A Short-Term Disability Later in Life
The average duration of disability claims in the U.S. is 32 to 35 months, according to The Council for Disability Awareness. Additionally, 1 in 4 workers will experience a disability during their careers. Also important to note - many disabilities are not tied to a physical injury. Disabling events that are occurring, especially later in life, are due to cancer, heart disease, auto-immune illnesses, or mental health conditions.
For this scenario, let’s assume the 35-year-old attorney has no disabling event for 20 years. At age 55, he is diagnosed with cancer and must take a year off work for treatment. His disability insurance policy kicks in, paying $120,000 in tax-free income over that year.
From age 35 to 55, he has paid $45,780 in total premiums. Even with just one year of disability, his return is substantial. If the disability were longer—two years, three years, or even permanent—the policy's impact is even more significant.
Addressing a Common Argument
Here is one argument individuals tend to make in the above scenario - “At age of 55, I’m hopeful enough money has been saved to take on an event like a disability, so a disability insurance policy does not make sense.” It is possible savings and other assets can alleviate the disability burden, but it’s more than just lost income. A disability tends to come with other potential costs in addition to everyday expenses. For example, cancer treatment, chemotherapy, and surgery—even with health insurance—can lead to tens or even hundreds of thousands of dollars in medical expenses.
Final Thoughts
The main point of this article is to show a realistic situation in which an income protection focused insurance policy still provides upside. Even in the case of a short-term disability, a long-term disability insurance policy provides significant value. It ensures financial stability during a difficult period, and prevents savings from being depleted due to unexpected medical costs.