Long-term disability insurance through an employer: Is it enough?

You take pride in providing for your family. But what if the unexpected happens and you can no longer work because of illness or injury?

Long-term disability insurance through an employer can be a valuable safety net, but it may not be robust enough to fully cover what you and your family need. If you're a key provider for your household, you may want the security of being able to replace as much of your income as possible if you can't work.

You have options for setting up long-term disability insurance coverage from your employer and elsewhere that can give you confidence in being financially prepared for the unexpected.

Long-term disability insurance exists to replace a portion of your income when you can't work for a reason covered by the policy. Nobody wants to imagine it, but injuries and illnesses can put you out of work for months, years or forever. The Social Security Administration estimates 1 in 4 people will become disabled between age 20 and retirement. The definition of "disability" and the specifics of coverage vary among plans, but qualifying conditions typically span musculoskeletal, cardiovascular, neurological, endocrine and congenital disorders as well as some cancers.

When a disability is so severe that it keeps you from working and earning a steady income, that's when long-term disability insurance is essential. The payouts can help you cover necessary expenses such as your housing, grocery and utility costs as well as medical bills—or anything you may need.

Usually, long-term disability insurance has a waiting period and starts paying out 90-180 days after notification of the onset of the disability. This means there may be a gap between your earned paychecks and the start of disability insurance.

Just like health insurance, you may be able to get long-term disability insurance from your employer or purchase it on your own or both. The main distinction is that employer-sponsored disability insurance is priced with coverage specifics that can apply to a whole group of covered people while disability insurance you buy on your own can help you cater to your specific needs.

Many employers offer group long-term disability insurance for free or at a low cost as part of a benefits package. It usually covers a significant percentage of your income but not all of it—most common amounts are 40% to 60%. There also may be caps on the total amount you can receive. This can be a valuable safeguard, but it's important to realize this fraction of your income may not cover all your financial needs.

How long does long-term disability last through an employer? It can vary widely and is set by your employer's policy. Long-term disability insurance may pay out until you recover or may be limited to a specific number of years or a designated retirement age.

Supplemental disability insurance is coverage that bridges the gap between what your employer's plan offers and what you need for more complete financial protection. You buy it separately, either from your employer if they offer it or from an insurance company of your choosing.

With most supplemental coverage, you can customize it by increasing the percentage of your income being replaced, extending the benefit period or including conditions not listed in your group plan. A supplemental plan can ensure you recover more like 80% of your income, receive payouts until retirement age or for life or have a wider range of covered scenarios.

If you get supplemental insurance through your employer, you'll still be limited to choosing what they offer, and it will only cover you as long as you remain employed with them. If you want more choices, the flexibility to tailor the coverage to your needs and the ability to keep coverage as long as you want, supplemental insurance is worth checking out.

Long-term disability coverage through your workplace can provide a baseline to sustain you and your family while you're out of work. But you'll want to consider whether it meets all your potential needs.

Carefully look at the specifics of your employer's plan. Check the benefit amount, the length of the benefit, the waiting period and any exclusions or limitations. Also, consider your employer's definition of disability as some plans may have stricter requirements than others.

If you have a physically demanding job or one with higher injury risks, you might want to have a more comprehensive disability insurance plan. Evaluate your workplace hazards and consider how they might affect your coverage needs.

Review your current financial situation. What are your essential expenses, and would your employer's plan adequately cover them? Also, consider your future financial goals, including retirement plans. A disability could significantly affect them, so it's crucial to ensure you have enough coverage.

You may have other sources of income, such as from a spouse, emergency savings or investments, that could factor into your coverage needs. However, unexpected expenses could quickly deplete the savings you thought you could rely on. It might be unsustainable in the long term.

Taxes also may play a role in your decision. If your employer pays the premiums for your long-term disability insurance, the benefits you receive may be taxable when paid out to you. If so, you'll receive less than the stated benefit amount. You may want to consult with a tax professional when evaluating your coverage options.

Supplemental disability insurance can offer extra protection beyond your employer's plan, allowing you to tailor coverage to your specific needs.

Here are some key factors to consider:

• Benefit amount. If your employer's plan doesn't replace enough of your income, a supplemental policy can help bridge the gap.
• Benefit period. Supplemental policies may allow you to extend your benefit period.
• Waiting or elimination period. A supplemental policy could help you shorten the time you have to wait before your benefits kick in after you've become disabled.
• Definition of disability. Some policies have a more comprehensive definition of disability, offering broader coverage.
• Additional features. Some policies offer optional riders that can enhance coverage, although they may be more expensive.
• Premium costs. While supplemental coverage provides greater protection, it comes at a cost, so consider how it fits your budget.

Determining whether your employer's long-term disability coverage is enough for future needs is a personal decision. Many factors must be considered, so it's essential to weigh your options carefully and determine if you may want to add supplemental coverage for another layer of protection.

A Thrivent financial advisor can help you review your current coverage, income and future plans to help you determine the best approach for meeting your needs.