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What is long-term disability insurance? p3

We are not quite finished with our discussion of long-term disability insurance.

With insurance, it is often easier to explain coverage and benefits by using an example. Here, we have been drawing on the experiences of a friend -- and her family -- after she was diagnosed with amyotrophic lateral sclerosis. ALS is terminal, but its course is completely unpredictable.

Our friend exhausted her short-term disability benefits, and her employer-paid long-term disability policy kicked in immediately. The two plans were very different, and that is typical. The benefit amount for the long-term policy was lower, a smaller percentage of gross weekly income than the short-term policy. However, the coverage period was longer.

Unlike property insurance or even health insurance, long-term disability policies do not limit how much money an insured can collect. If your house is struck by lightning, your homeowners' policy may cover up to $500,000, and there may also be a deductible.

With long-term disability, the insurer typically sets limits on how long the benefits will be paid, regardless of the dollar amount. Some policies limit benefits to two or three years -- long enough to get a Social Security Disability application processed (cross your fingers it doesn't take longer). Other policies will end benefits once the insured turns 67 and becomes eligible for government benefits.

Our friend was lucky to have employer-paid coverage. It was a perk that came with her status as a manager. Lower-level employees were offered coverage through the employer's plan but had to pay for it themselves. Granted, the rates were lower than they would have been had they purchased individual policies.

That brings us to another question, though: Should you buy your own long-term disability coverage? We'll get into that and other issues with long-term disability coverage in another post.

Source: World Institute on Disability, "Short-Term and Long-Term Disability Insurance: The Details," accessed Sept. 22, 2014

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