If your employer doesn’t offer long-term disability insurance (LTD), you find yourself in a situation shared by millions of American workers. Getting individual long-term disability insurance is one of the foremost options if employer offers no LTD, but evaluating private LTD policy choices and comparing them to LTD alternatives can be a complex undertaking. Understanding the types of disability insurance coverage and some of the leading alternatives to long-term disability can make it easier to determine what to prioritize as you search for a policy that fits your needs.
Are Employers Required To Provide Long-Term Disability?
Many American workers receive health insurance coverage for themselves and their families through their jobs. Even though certain economic trends, such as a shift toward hiring “gig” workers in some industries and corporate policies that favor replacing full-time jobs with two or more part-time positions not eligible for benefits, have led to a gradual decrease in the availability of jobs offering medical benefits, health insurance remains a leading concern for Americans as they look for new jobs. The importance job candidates often place on securing healthcare coverage also means that offering robust health insurance has become a powerful tool in many employers’ recruitment toolkits.
More Employers Offer Health Insurance Than Disability
The same is not necessarily true for disability coverage. Employers are somewhat more likely to offer short-term disability insurance (STD) than its long-term counterpart, but jobs that offer benefits for non-work-related disabilities on any timeframe are in the minority. The Bureau of Labor Statistics (BLS) reports that in 2018, only 32% of private-sector employees had access to employer-sponsored LTD, while 34% had access to employer-sponsored short-term disability.
Do I Really Need Long-Term Disability Insurance?
The relatively low availability of employer-sponsored group plans for disability insurance might seem to create a natural demand for individually purchased STD or long-term disability options. Several insurance providers with a strong national presence do offer private LTD policy choices. However, the reality is that most people who have long-term disability insurance are on employer-sponsored group plans, rather than policies they have selected and purchased individually.
Types of Disability Coverage in the United States
In the United States, there are four main types of disability benefits that are associated with some form of insurance and that assume an employment history. One is federal, one is private but heavily regulated at the state level, and two are private but frequently managed via group plans, as follows:
- Worker’s compensation: Private insurance that most employers are required to purchase in most states, with state regulators setting rules for disability coverage
- Social Security Disability Insurance (SSDI): Federal program that provides monthly payments to disabled individuals who meet certain medical and work history requirements
- Short-term disability: Private insurance offered by some employers and available for individual purchase, offering partial replacement of income for a period of time usually less than six months
- Long-term disability: Private insurance offered as an employee benefit in some companies and available for individual purchase, replacing a portion of lost income over periods that can range from several months to many years
SSDI should not be confused with another Social Security program, Supplemental Security Income (SSI). Unlike the types of disability coverage mentioned above, SSI does not assume an individual history of previous employment, and some of the most common qualifying criteria are linked to lifelong disability, rather than becoming disabled after already embarking on a career.
Getting Individual Long-Term Disability Insurance
Although there are alternatives to long-term disability insurance, most of them have some shortcomings compared to LTD plans. Workers’ compensation may provide relatively robust coverage, but only when the disability results from a work-related illness or injury. Social Security disability benefits are available only to individuals with an established work history who also meet the SSA’s notoriously strict standard for disability. STD can be enormously helpful, but by its nature is extremely short-lived.
Understanding Private LTD Policy Choices
Similar to the way that people sometimes refer to “filing for disability” without specifying which kind of insurance they have in mind, it is also common to see some imprecision in what people mean by “private” insurance. In formal industry terms, insurance is “private” whenever it is not managed by a government agency.
Management vs. Regulation
Management and regulation can be closely related concepts. However, in terms of government control over an industry the distinction between them has important implications for private LTD policy choices. For example, state and local governments generally regulate the sale of alcoholic beverages in terms of placing parameters on who can sell them, to which customers, and under what circumstances. However, state and local governments do not usually manage those sales in terms of actually distributing alcoholic drinks in exchange for money.
There are a few types of insurance in the United States that are actually “managed” by government agencies. Medicare and Medicaid for health insurance and SSDI for disability insurance are the dominant examples. “Private” insurance covers any plan under which a person or a business has a policy through a private company.
State Regulations on Insurance Providers
The states do regulate the insurance industry by applying parameters to how insurance providers can operate within their borders. These parameters often include minimum standards for coverage, rules for how long companies must give policyholders to appeal denied claims, and so on. In any given state, employee options if employer offers no LTD will be shaped by the private LTD policy choices insurance companies have developed to comply with the regulations in that state. Understanding this dynamic can sometimes be helpful in identifying what to look for in private LTD policy choices and thinking about the policy provisions you are likely to value most over time.
Is Private Long-Term Disability Insurance Worth It?
High premium costs tend to be among the most significant factors discouraging American workers from getting individual long-term disability insurance. The premiums for group plans often have a lower per-policy cost than those purchased individually. In addition, employers often pay a substantial portion of their employees’ premiums when they do offer LTD coverage, so the comparison can be especially stark for workers who are thinking about getting individual long-term disability insurance policies in order to maintain coverage as they change employers.
Common Alternatives to Long-Term Disability Insurance
Evaluating whether the premium costs on any private LTD policy choices you may be considering make sense for your situation requires comparing those costs to your other options. Some of the most common LTD alternatives include:
- Personal emergency fund
- Early retirement
- Partner or family financial support
Workers’ compensation and public assistance via SSDI may also be options if the appropriate circumstances apply, but for most people the desire to ensure coverage for situations in which neither workers’ compensation nor Social Security disability benefits would be available is a major factor in looking for private LTD policy choices if an employer doesn’t offer long-term disability insurance.
Personal Emergency Fund: Advantages and Limitations
A personal emergency fund has the notable advantage that it is solely in the control of the individual who establishes the account and puts money in it. In this situation, there is no need to wait for long-term disability claim review, and no state or federal regulations dictating the conditions for receiving benefits.
On the other hand, the month-to-month expense of creating a personal emergency fund substantial enough to cover long-term disability may not be less than the cost for the premium on a personal LTD policy. In many cases, the amount an individual worker would need to set aside each month to build this type of financial resource might actually be greater than those they would need to pay for premiums. Additionally, personal emergency funds are usually built up over a period of years, whereas most long-term disability plans have a much more limited exclusion period between enrollment and benefits eligibility.
Early Retirement vs. Disability Benefits
Some employment systems and some retirement plans will pay reduced retirement benefits to individuals who take early retirement under certain conditions. The applicable conditions vary by employer and plan, as does the duration of employment that qualifies for benefits. As a rule, the earlier you retire, the greater the reduction in benefits will be compared to the “full” benefits that would be guaranteed to an employee retiring on the predetermined schedule.
Whether early retirement is a realistic option for dealing with an extended or potentially permanent disability in a given situation will depend on a number of factors. Two that will play an important role in most cases are:
- The career stage of the disabled employee
- The company terms regarding retirement eligibility and portability of accrued retirement benefits
Retirement benefits are much more likely than disability insurance to be subject to strict federal rules, so if you are at the mid-point of your career and beyond and you are thinking of early retirement as an alternative to getting individual long-term disability insurance, you may want to think about discussing your options with an attorney.
Financial Support From Partner or Family
Sometimes the availability of a strong support network can make a difference in whether getting individual long-term disability insurance looks like a compelling option to you. For individuals with high-income partners or generational wealth, the options if employer offers no LTD may include financial dependence on those support networks. On the other hand, for people who are the primary source of support for their families, getting individual long-term disability insurance can be as much about protecting their financial dependents as it is about securing their own futures.
How To Pick a Disability Insurance Policy?
If you are thinking about getting individual long-term disability insurance because of concern about personal options if employer offers no LTD, there are a few tips you may want to keep in mind as you evaluate private LTD policy choices. Think about the stage your career is in, and try to estimate your earning potential from now to your expected age of retirement. Consider whether you would be able to change careers and earn a similar income in a less demanding position within a relatively short period of two to five years. Compare the costs of insurance premiums, not just to each other but to what you would need to add to a personal savings fund each month to secure for yourself a realistic income replacement comparable to that offered by each policy you are considering. Speak not just with insurance agents, but with attorneys working in disability and related fields, to get the benefit of professional perspective in weighing the risks and advantages of all your options. Read through the terms of any policy with an attorney before you sign. Finding your own path to financial security when your employer doesn’t offer long-term disability insurance can be challenging, but it also means you get the chance to select the private LTD policy choices that make the most sense for your own situation.
Finding the Right Strategy for You
Choosing how to prepare for the possibility of a long-term disability when your employer doesn’t provide LTD coverage requires careful planning and honest evaluation of your finances, career stage, and risk tolerance. While private long-term disability insurance can be a powerful safety net, it is not the only option and it may not be the best fit for everyone. Whether you decide to purchase an individual LTD policy, build a robust emergency fund, or explore alternative strategies like early retirement, the most important step is to take proactive measures now. With thoughtful preparation and trusted professional guidance, you can create a plan that protects your income and gives you confidence in your financial future.
