Managing Long-Term Disability Risk: Part One

By Greer Gibson Bacon, CFP®

If you count on earned income to pay living expenses and save for the future, you need long-term disability insurance.  Here's why.  If you're under 65, you're more likely to suffer long-term disability than die.  Almost 30% of workers age 25-65 experience a disability lasting 90 days or more.  Yet, most fail to manage this risk and the financial consequence can be catastrophic.  Disability income protection may come from Social Security, workers' compensation, and group or individual insurance.

A fundamental principle of insurance is the “large loss principle”.  It means insuring for large losses before small losses.  Accordingly, it means insuring for long-term disability before short-term.  Short-term disability should be managed with your emergency cash reserve and sick leave.

  • Social Security pays benefits to workers with a total and permanent disability that is expected to last 1 year or more or result in death. This ultra-strict definition explains why only 36% of all claims are approved.

To file a claim, you must be fully and currently insured.  This means having 40 quarters of covered employment, of which at least 20 quarters were earned in the last 10 years[1][2].  To see if you're covered, go to and set-up a MyAccount.

If your claim is approved, your benefit equals your primary insurance amount (PIA)[3].  But, it may be reduced for any disability benefit paid under federal, state or local law, like workers' compensation.  Depending on modified adjusted gross income (MAGI), benefits may be 100% tax-free or up to 85% taxable.

  • Workers' compensation pays benefits to workers disabled by occupational accident or illness.  It may pay medical, health-related travel and other benefits, too. 

Permanent partial disability awards are paid for specified disabilities (like loss of a limb) are statutory amounts and will not stop if you return to work.  Whereas, awards paid for unspecified disabilities (like partial loss of limb function) are not statutory and may stop if you return to work.  Absent a structured settlement agreement, such awards may be paid as a lump sum.

By contrast, permanent total disability pensions are paid as a monthly annuity.  In general, the single life annuity equals 60-75% of your prior wages and benefits depending on whether you elect a survivor annuity or not, and other factors. Although benefits are tax-free, they may be reduced if combined Social Security and workers' compensation benefits exceed a certain limit.

Workers' compensation covers a broad spectrum of disability and offers a broad spectrum of benefits.  But, in 2016, only 1% of workers missed work due to an occupational cause. 

Since Social Security and workers' compensation may not provide sufficient benefits, you shouldn't rely on them as your primary coverage.  You may not have a total and permanent disability (required by Social Security) or occupational disability (required by workers' compensation). Still, you may have a disability resulting in material loss of income.  To be continued...

This is Part One of a multi-part series, discussing the important topic of long-term disability and your primary sources of coverage. 

Look for Part Two in the next issue of The Message.

[1]In 2018, you earn one quarter of coverage for every $1,320 you subject to a four quarter maximum.

[2]Special rules apply to those 30 and younger or blind.

[3]Your dependents may claim benefits, too.  But, they will be subject to a family maximum.


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