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How To Find the Best Long-Term Disability Insurance

By Jacinta Sherris
best long term disability insurance

Looking for the best long-term disability insurance policy? Before you settle on a decision, it’s important to understand how they work and why you’d need one in the first place. 

Some people find it’s worthwhile to supplement their policy with other safety-nets or opt for alternatives altogether. In this guide, we’ll go over all the factors that make up the best long-term disability insurance policy and what you’ll need to know to stay protected. 

How does long-term disability insurance work

Long-term disability insurance works similarly to other types of insurance. Home insurance protects your home in case of fire or theft, health insurance protects you when you fall ill, and long-term disability ensures you’ll have enough money to pay the bills if you are unable to work in the future. 

As a policyholder, you’ll make monthly payments—known as premiums—to your long-term disability insurance provider. In the event you suffer from an injury or illness that prevents you from working for an extended period of time, your provider will supplement a percentage of your salary. 

Is long-term disability considered earned income?

Most long-term disability insurance policies will supplement a percentage of your salary, which is typically between 50% and 60% of your salary. The IRS considers these payments as income, and you will have to report your proceeds from your long-term disability insurance on your year-end tax return. 

What makes a good long-term disability insurance policy?

Long-term disability insurance policies differ based on the cost of your premiums, the benefit amount, the amount of time you must wait to claim your benefits, how long your benefits will last, and what’s considered a disability. 

Cost of premiums

Premiums are monthly payments you must pay in order to qualify for your long-term disability insurance policy. Ideally, you’ll want your premiums to be affordable. Extremely low premiums are often associated with policies that provide limited coverage. 

Benefit amount

The benefit amount is how much money you’ll receive in the event you become disabled. Oftentimes, benefits are paid on a monthly basis. The sweet spot for benefits is usually between 50% to 60% of your salary. 

Benefit period

The benefit period refers to how long your benefit payments will last if you become disabled. Most long-term disability insurance policies will provide benefits for an average of two and a half years. If you’re worried about your ability to recover in the event of an injury, you may want to explore policies with longer benefit periods. 

5 best alternatives to long-term disability insurance

If you’re unsure about whether or not you can afford a long-term disability insurance policy, or whether it’s even worth the cost – know that you have alternatives. There are still ways to protect yourself in case you can’t work due to a serious medical condition. 

Take a look at the 5 best alternatives to long-term disability insurance! 

Annuities

Annuities are financial contracts you enter into with an insurance company or financial institution. In many ways, they work similarly to traditional insurance policies. You’ll make monthly payments to the company—sometimes even a large lump sum—in exchange for continuous payments at a later date. 

Annuities are distinctively different from traditional insurance policies because they essentially come with a guarantee. An insurance policy won’t come into effect unless you are injured or become sick. That means that you could end up spending tons of money without reaping any payments if you never become disabled. 

With annuities, the company promises to make payments to you by a set date. However, the amount of money you receive may vary depending on the policy. The total value could also be subject to market fluctuations. 

Best for: People looking for a guarantee 

Benefits: There’s more certainty you’ll receive payments with an annuity over a traditional insurance policy. Annuities are also very flexible and can be customized according to your needs. You can even use them for retirement. 

Home equity 

Homeowners that have built up equity may be able to tap into their reservoir of cash in place of a traditional long-term disability insurance policy. Most homeowners have the option to take out a home equity loan or home equity line of credit. Both types of financing use your home as collateral. You may be able to borrow as much as 80% of the equity you’ve built up. 

Best for: Homeowners

Benefits: Interest rates are typically fixed and lower with home equity than they are for other types of financing. Home equity lines of credit can also be extremely flexible since you’ll be able to withdraw funds as you need them and only pay back what you’ve borrowed. 

Critical care insurance

Critical care insurance works similarly to long-term disability insurance, albeit there are several distinct advantages of the former insurance type. For starters, critical care insurance pays a lump sum instead of monthly payments. 

This can be helpful in the event you have medical bills to cover or other large expenses. Critical care insurance also comes with fewer restrictions on what you can use the funds for, whether it’s health expenses or everyday bills. 

However, this type of policy does not cover chronic health conditions. You’ll only receive funds if you meet the provider’s list of qualifying conditions. 

Best for: People looking for a lump sum payment instead of monthly payments

Benefits: Critical care insurance is inherently flexible and it allows you to use the funds for long-term care. 

Savings account

A savings account is likely to be your most flexible and affordable alternative to long-term care insurance. That’s because you can deposit as much money as you’d like and all of that money belongs to you. In the event that you become disabled, you can use it to cover your expenses. The hope is that you will never suffer from a dire medical condition, in which case you can use the funds for just about anything. 

The downside is that you can only withdraw as much money as you’ve put in, so in other words, if you’re not able to save a lot, you won’t receive a ton of help. Nevertheless, savings accounts can also complement other policies and serve as additional backup. 

Best for: People looking for flexibility

Benefits: There are no premiums. You can contribute as much money as you please and you can use that money for just about any type of expense. 

Short-term care insurance

While long-term care insurance plans pay out benefits over several years, short-term care insurance plans pay out benefits over several months. As a result, they are typically cheaper and more affordable, but they usually feature fewer benefits. 

Best for: People looking for more affordable options

Benefits: Monthly premiums are usually lower than other types of policies. 

Protect your assets with a MoneyLion investment account

Insurance policies and their alternatives can only get you so far. It’s also important to focus on building wealth through your own investment account. Only by creating multiple streams of income through investments can you diversify your financial safety net and retirement portfolio.

Take MoneyLion’s fully-managed portfolios for instance. You can invest as little as $5 per month for a flat rate of $1 per month. You’ll also have access to different asset allocation portfolios developed in partnership by none other than Wilshire Associates, a 30-year investment industry leader. Download the MoneyLion app to learn more.

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