Long-term disability benefits(LTD) replace a portion of an insured person’s income during a period of long-term disability. A long-term disability may be caused by an injury or illness. Generally, monthly payments commence after a specified waiting period and continue while the employee remains disabled or up to the age of 65. Payments are a percentage of the earned income lost by the employee due to the disability.
Long-term disability benefits are one of the most important benefits available in both a group benefits plan and/or individually. An extended disability can create a significant financial hardship. Being disabled typically means that your source of income is lost. With your source of income lost it is extremely difficult to pay existing expenses and there will typically be added expenses related to the disability itself.
The waiting period for a long-term disability benefits plan can also be referred to as the qualifying period or elimination period. The waiting period typically aligns with the end of the short-term disability benefit period. The waiting period is the amount of time that the employee must be disabled before the payout of benefits will commence. The most common waiting periods are 90, 112 and 180 days. Typically, the longer the waiting period, the lower the premium. With a longer waiting period there may be a higher likelihood of the employee returning to work and in turn, fewer claims.
The benefit duration or benefit period is the maximum amount of time that the benefits are payable for under the long-term disability benefits plan. Typical benefit duration options are two years, five years and to age 65.
The benefit schedule or formula for a long-term disability benefits plan will typically replace 55% to 75% of an employee’s pre-disability gross earnings, subject to a maximum monthly dollar amount. The tax status must be a factor in determining the appropriate benefit schedule.
In a group long-term disability benefits plan, the tax implication of the benefit will be based on the level of employer contribution. If the employee pays the entire premium, the benefits are tax-free or non-taxable as the employee is paying with after-tax dollars.
Taxable long-term disability benefits plans (100% employer paid) are typically based on a higher percentage of the employee’s pre-disability gross earnings. Typically, the benefit schedule will be as high as 75% of pre-disability gross earnings. The common options available are 50%, 60%, 66 2/3%, 70% and 75% of pre-disability gross earnings.
Non-taxable long-term disability benefits plans (100% employee paid) are typically based on a lower percentage of the employee’s pre-disability gross earnings. Typically, the benefit schedule will not exceed 66 2/3% of the employee’s pre-disability gross earnings. Common options available are 50%, 60% and 66 2/3% of pre-disability gross earnings.
Graded formulas can also be used to calculate the long-term disability benefits for non-taxable plans. They are used to avoid overpaying for a benefit that is more than the maximum one could receive from all sources (all-source maximum).
An example of a graded formula:
- 66 2/3% of the first $5,000 of monthly pre-disability earned income
- 50% of the next $3,000 of monthly pre-disability earned income
- 40% of the remainder
Two types of benefit maximums apply to a LTD benefit. The non-evidence maximum (NEM) and the overall maximum (OM).
The non-evidence maximum is the amount of insurance that the insurer will provide to an individual without them being required to submit evidence of good health. Any amount an employee is eligible to apply for above the non-evidence maximum requires the employee to submit medical evidence to the insurer. The insurer will then ask for further information if required, approve or decline the excess coverage. As some employees may not qualify for coverage medically, the NEM wherever applied is an extremely valuable and important feature of a group benefits plan.
The overall maximum is the maximum amount of insurance that the insurer will provide and is outlined in the benefit schedule.
All Source Maximum:
The all source maximum’s purpose is to prevent a disabled employee’s total disability income from nearing his or her pre-disability earnings from various sources. This is to ensure that there is a financial incentive to return to work. If the benefit is taxable, the all source maximum is based on a percentage of pre-disability gross earnings, typically 85%. If the benefit is non-taxable, the all source maximum is based on a percentage of pre-disability net income, typically 85%, where, net income is defined as income after tax. The benefit amount is reduced when it exceeds the all source maximum. Included in the calculation are direct and indirect offsets such as CPP/QPP disability pension benefits, workers’ compensation benefits, auto insurance benefits, benefits payable from an association plan or other group disability program, earnings from any employer, self-employment income, retirement or pension plans etc.
Definition of Disability:
A group benefits plan uses two basic definitions of disability: any occupation and own occupation. Disabled employees must meet the applicable definition of their group plan in order receive LTD benefits.
Any occupation refers to whether the employee’s disability renders him or her unable to perform any occupation (not just his or her usual occupation). An employee is considered to be totally disabled if he or she is determined medically to be unable to perform the essential duties of any occupation for which he or she is reasonably qualified for or may become qualified based on education, training or experience.
Own occupation refers to whether the disabled employee is determined medically to be unable to perform the essential duties of his or her own occupation. This is the most common definition and most insurers apply the own occupation definition for the first two years of an employee’s disability. Thereafter, the employee must be medically unable to perform the substantial aspects of any occupation for which he or she may be qualified for or may become qualified for by reason of training, education or experience in order to continue receiving LTD benefits.
Partial and Residual Disability:
Typically, these definitions are added on to the standard LTD contract as an option or available to larger companies.
Partial disability benefits provide protection for a plan member who is able to work at a limited capacity while receiving long-term disability benefits.
Residual Disability allows a plan member that is disabled to work in a limited capacity during the elimination period and still have those days’ count towards satisfying the elimination period.
Cost of Living Adjustment (COLA):
Typically, COLA is added on to the standard LTD contract as an option.
Should a lengthy disability impact anyone, the impact of inflation can effectively diminish the value of disability benefits. One can reduce the impact of inflation by adding COLA or cost of living adjustment to their group LTD plan. COLA typically provides an indexing of the disability payment based on any adjustment in the Consumer Price Index (CPI), not to exceed a chosen amount. The amounts typically available to choose from are 2%, 3%, 4%, 5%, and 6%.
Some insurers provide an option to allow an employee to convert part or all of his or her terminated disability benefit to an individual policy. The employee must provide proof of income from their new employment or business, have been actively working for the employer at the time of the termination of coverage and been insured under the employer’s LTD plan.
Waiver of Premium:
The waiver of premium provision allows the insurer to waive the premium payable with respect to LTD benefits while the disabled employee is receiving the benefits and is typically tied to a similar provision in the group life insurance plan.
Some plans may offer an add-on to have spousal disability insurance added to the group benefits plan. This is not commonly offered by all plans and the benefit will be limited to a small amount. The benefit period may be limited to a set number of years such as two. The benefit may have different qualifying requirements than the group plan it is tied to.
Group LTD coverage will contain a pre-existing condition provision. The provision will typically exclude coverage for any medical condition that existed and for which an employee received treatment during a specified period prior to and after becoming eligible for benefit coverage. The period will vary.