If you have long-term disability (LTD) insurance and you become unable to work, the insurance company will pay you part of the salary or wages that you earned before becoming disabled.
How Much Will My LTD Benefit Be?
The exact amount you'll receive depends on the terms of your policy, but most LTD plans allow you to collect from 50% to 80% of your gross monthly salary. However, some policies will simply provide you with a fixed monthly amount that does not take your salary into account.
You should check your policy's summary plan description or speak with your company's human resources department for specific information about your plan's benefits.
Other Factors That Can Influence Your LTD Payment
Your payment can be reduced or increased if you can do some amount of work, if your policy has a COLA provision, or if you receive other benefits.
Partial Disability Benefits
If you're still capable of working, but only in a job where you earn substantially less than you did before you were injured (often between 20% and 80% of your previous salary), you may qualify for partial disability benefits. In this case, your monthly disability payment will be reduced in proportion to the amount of work you can still do.
If you can only earn a small fraction of your previous salary, say 10-15%, you will usually receive the full LTD amount.
Occasionally an LTD policy will have an annual cost of living adjustment (COLA) as part of its basic coverage. More frequently, the COLA is an optional rider that you can purchase for an added fee. If your policy contains a COLA, your benefit amount will be indexed to inflation, usually as measured by the Consumer Price Index. That means your monthly payments will likely increase, usually by 1-3% a year, for as long as you receive benefits.
Offset for Other Benefits
If you've been approved for LTD, most policies state that you must file for Social Security Disability if you haven't already done so. Your LTD insurance company will sometimes hire an attorney to represent you in your Social Security case. If Social Security finds you disabled, your LTD benefits are usually reduced by the monthly amount you receive in Social Security.
If you receive substantial back benefits from Social Security, your insurance company may even seek to recover some or all of those benefits based on the Social Security offset. This explains why most insurance companies are eager for their LTD recipients to file for Social Security Disability.
Many LTD policies also have offset provisions for Workers' Compensation, retirement benefits, and lawsuit settlements.
Some individuals applying for LTD wonder whether they'll have to continue paying premiums on their policy if they get approved for disability benefits. Because the vast majority of LTD policies contain a "waiver of premium" clause, you usually do not need to keep paying premiums if you receive LTD.
Taxation of Benefits
The question of whether your LTD benefits are taxable is somewhat more complicated. In general, most "group" LTD plans (like those offered by employers and professional associations) are paid for with pre-tax dollars from the employer, so any LTD benefits received are treated as taxable income.
In contrast, most individual plans (those you purchase yourself) are bought with after-tax dollars, so any resulting benefits are not taxed.
When Will My LTD Benefits Begin? When Will They End?
If your LTD insurance company provides short-term disability insurance, you won't begin receiving LTD benefits until after your short-term coverage has expired. Short-term coverage typically begins after you've exhausted all your sick leave, and it generally lasts for three to six months, depending on the policy. Short-term coverage usually pays out a higher percentage of your salary than does long-term coverage.
In addition, employees are usually required to have worked for the employer for a minimum amount of time before they're covered, and most LTD policies have an "active work requirement" so that only full-time employees are eligible.
The length of time you'll receive benefits can vary widely depending on the policy. Some plans pay benefits for a fixed number of years (usually two, three, five or ten), while others will provide payments until you turn 65. Note that most LTD policies have a twenty-four month limitation on benefits based solely on mental or nervous conditions.
For more information, see our article on the requirements for long-term disability benefits.