Many of our young professional clients begin financial planning conversations upon realizing they need both a thoughtful financial plan and life insurance to protect their loved ones in the event of their premature death. After purchasing their first home, they also look to protect what they think is their most valuable asset. Interestingly, very few clients realize that their most valuable asset is typically something that will never appear on their balance sheets: their ability to earn future income.

Long-term disability insurance is a crucial part of any thoughtful, comprehensive financial plan. It’s arguably as important if not more so than any other type of insurance because of the size of the future asset it protects, the likelihood it will be needed, and the magnitude of risk facing those who have inadequate coverage. Though the likelihood of disability is often underestimated, statistics show that a 30-year-old is four times more likely to become disabled before age 65 than to die prematurely. The Social Security Administration reports that currently, one in four 20-year-olds can expect to be out of work due to a disabling condition for a full year or more before reaching retirement age.


A 2017 study by the American Council of Life Insurers indicated that nearly a third of working Americans do not have disability coverage beyond the limited coverage Social Security offers. Yet the consequences of long-term disability can be severe. A 2014 study published in the Maine Law Review identified medical bills (26 percent), lost job (20 percent) and illness or injury of one’s self or family member (15 percent) as the primary reasons for consumer bankruptcy filings.

Beyond the expense, one barrier to having proper long-term disability coverage is its complexity. Coverage choices include numerous elements, options, riders and definitions. To put it in simple terms, all types of coverage work by replacing a portion of a worker’s predisability income for a specified period when a disability event meets each of the requirements defined by the policy.

While we can’t outline every consideration, here are a few crucial definitions and policy elements that you’ll want to think about when evaluating a policy.

Definition of disability A policy’s definition of disability outlines what conditions are required for the policy to pay a benefit. This is a critical element of every policy, and there are a wide range of options to consider. A knowledgeable advisor can assist with navigating these options, including industry-specific definitions, which can be critical for specialists like surgeons.


Benefit amount This is the amount the policy will pay out in the event of a disability. Typically, insurers will not underwrite 100 percent of predisability income so clients often try to maximize this amount to limit the financial risk of a disability event as much as possible.

Taxability If the policy is an employee benefit and the employer receives a tax deduction on the premium payments, any benefit received would be considered taxable income to the employee. Policies purchased with after-tax dollars typically provide a tax-free benefit.

Exclusion period In the event of disability, there is a period of time that must pass before long-term disability benefits are paid. Typically, employers have either a 90- or 180-day short-term disability plan that provides some coverage during this exclusion period. You’ll want long-term coverage to start as soon as any short-term coverage period ends.

Benefit period The benefit period defines how long benefits can be paid, either for a fixed maximum number of years or until a certain age.

Cost of living adjustment (COLA) COLA is often an optional element that provides an annual increase in the benefit amount and is typically indexed to the consumer price index. A policy without this feature will have a level benefit whose purchasing power will be eroded over time by inflation.

Portability By owning a supplemental policy outside of an employer-sponsored long-term disability plan, you can keep the coverage no matter where or when you choose to work. Most coverage offered through an employer cannot be continued after you leave the company.


Having adequate disability coverage in place is a critical component to any comprehensive financial plan. Working with a knowledgeable advisor can help minimize risk and ensure financial security for you and your loved ones in the event of an unexpected long-term disability.

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Saugatuck Financial is a marketing name for Lou Nistico and is not a broker-dealer, registered investment advisor, subsidiary or other corporate affiliate of the Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM). Northwestern Mutual is the marketing name for NM and its subsidiaries. Charise, Schor and Janoff are representatives of Northwestern Mutual Wealth Management Company®, NMWMC Milwaukee, WI, a subsidiary of NM and limited purpose federal savings bank, and registered representatives of Northwestern Mutual Investment Services, LLC (securities), a subsidiary of NM, registered investment advisor, broker-dealer and member FINRA and SIPC.