Understanding Long-Term Disability Insurance 

Dan Suprenant is a senior director of Insurance Solutions at Northwestern Mutual.

Whether you get seriously injured or develop a long-lasting illness, being unable to work could be devastating for your finances. And according to the Social Security Administration, a 20-year-old worker has a roughly 25 percent chance of becoming disabled before reaching their full retirement age. (That’s age 67 for anyone born after 1960.)

The good news is that long-term disability insurance can help you bridge the financial gap by replacing some of your lost wages. That’ll help you pay bills and continue to progress toward your financial goals.

Let’s unpack the different types of long-term disability insurance, how it all works and how it’s different from short-term disability insurance. You’ll learn the answers to some common questions about disability coverage.

What is long-term disability insurance?

Disability insurance is designed to replace a portion of your earnings if you get sick or hurt and can’t work. As the name suggests, long-term disability (LTD) insurance kicks in if you have a qualifying disability for a prolonged period of time—usually, at least three to six months. 

How does long-term disability insurance work?

Most LTD insurance plans are provided by your employer as part of your benefits package. The downside is that most LTD plans cover only about 60 percent of your regular income—and because the employer usually pays the premium, the benefits payable are usually taxable. That’s why it can be a smart move to purchase a supplemental individual disability income (IDI) insurance policy, which can provide additional income that is usually tax-free.  

When you get an IDI insurance policy, you’ll make premium payments to keep it active. Then, if you become sick or hurt and can’t work for an extended time, you can submit a claim. Once the elimination period, or waiting period, ends and your claim is approved, you’ll begin receiving benefit payments according to the terms of your IDI insurance policy. 

You’ll typically get a monthly benefit payment as a direct deposit to your bank account. You can use the money for anything you’d like. For example, you can use the money to help pay bills, like rent or mortgage, plus any student loans—and still keep some contributions flowing into your retirement account.

Can I use short-term and long-term disability insurance together?

Yes, short-term disability (STD) insurance and LTD insurance can work together in your overall financial plan to help protect your income and lifestyle. Both can help replace some of your earnings if you’re sick or injured and can’t work, but there are some important differences.

Short-term disability insurance 

• Usually kicks in soon after a qualifying injury or illness, usually one or two weeks 
• Typically lasts for three to six months, depending on your STD policy 

Long-term disability insurance 

• Generally takes effect three to six months after a qualifying injury or illness, depending on your LTD policy 
• Can last for a set amount of time or (usually) until you reach a certain age, like when you turn 67 or 70 

If you qualify for an STD insurance claim, depending on the insurance company, you may still need to do the paperwork to file for an LTD insurance claim. Having both types of coverage can help you pay your bills while you’re unable to work.

Long-term disability benefits explained

Your LTD benefit refers to how much money you’ll receive each month in payments from the insurance company if you become disabled due to a qualifying injury or illness. The goal is to get enough coverage to replace as much of your income as possible.

Another key consideration with any disability income protection is whether your policy will pay a benefit based on a disabling condition that prevents you from working at any job—or one that prevents you from working in your own job or your own occupation. An “own occupation” policy strengthens your coverage by protecting your income if you’re unable to complete your particular occupation’s regular duties. With own occupation coverage you won’t be required to be unable to work in some “other” job in order to continue getting disability insurance benefits.

What qualifies as a long-term disability?

The first thing that comes to mind may be a serious accident that makes it difficult to work. While that can certainly happen, the most common causes of long-term disability include:¹

• Heart disease,
• Musculoskeletal issues,
• Cancer, and
• Anxiety and depression.

Thousands of other medical conditions could potentially lead to a person experiencing a long-term disability.

How long do long-term disability benefit payments last?

The amount of time that your long-term disability insurance pays out will depend on your policy. This is known as the maximum benefit period. Some LTD policies will pay monthly benefits for a set time frame, such as five or 10 years. Most LTD policies will pay benefits until you reach a certain age, most often 65, 67, or 70. By comparison, weekly STD benefit payments will typically last between three and six months, depending on the specifics of your STD policy.

Choosing the right long-term disability insurance

LTD insurance plays an important role in protecting you financially. It acts as a safety net, which can allow you to continue receiving income if you’re injured or ill and unable to work. That can help you avoid tapping into other assets—such as savings, retirement funds or other investment accounts—to pay your bills.

How much long-term disability insurance do I need?

Our disability insurance calculator will consider factors like your age, occupation, income and expenses to help you estimate the right amount of coverage. Then your Northwestern Mutual financial advisor can help you iron out the details and tailor your policy based on your unique situation and financial goals.

That way, if you become sick or injured, you can avoid depleting your savings, tapping into investments or pausing your retirement account contributions. Because life doesn’t always go according to plan, your advisor can help you establish a sound strategy to help protect your income and your lifestyle while also allowing your assets to grow.

Not all contracts and optional benefits are available in all states. Disability insurance policies contain some features and benefits that may not be available in all states. The ability to perform the substantial and material duties of your occupation is only one of the factors that determine eligibility for disability benefits. These policies also contain exclusions, limitations and reduction-of-benefits provisions. Eligibility for disability income insurance and additional policy benefits and qualification for benefits is determined on a case-by-case basis. For costs and complete details of coverage, contact your Northwestern Mutual financial representative or your group plan administrator.  

Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life insurance, disability insurance, annuities, and life insurance with long-term care benefits).