Long-term disability (LTD) benefits pay a percentage of your salary or wages and can be increased by cost-of-living adjustments (COLAs) and/or decreased by offsets of other benefits, earnings from work, and taxes.
Calculating Your Base LTD Payment
Depending on your policy, your long-term disability (LTD) plan will typically pay between 50% and 80% of your "pre-disability earnings," up to a maximum.
Usually your pre-disability earnings consist solely of the monthly wages you were earning right before you became disabled, but some policies factor in other forms of compensation such as bonuses, commissions, and overtime. All LTD plans have a maximum monthly payment, which can range in between $4,000 per month to $25,000 per month.
Read your policy's summary plan description or check with the human resources department at your company for the specifics of your plan. Also, ask your claims handler for your earnings calculations to make sure your pre-disability earnings were calculated properly.
Cost of Living Adjustment
If you've been approved for benefits, you can expect your benefits to increase 1% to 3% each year if your policy contains a cost-of-living adjustment (COLA). The COLA may be part of your basic coverage or offered as an optional rider, and it is usually indexed to a well-known measure of inflation, such as the Consumer Price Index (CPI).
Offsets for Other Income
Variables that can lower your LTD amount include other benefits or earned income and whether your benefits are taxable.
Social Security Disability Benefits
Virtually all LTD policies require you to file for Social Security disability, because LTD carriers can offset your Social Security disability benefits against your monthly LTD payment. The offset works like this: if you receive $1,400 in LTD benefits and are approved for $1,100 from Social Security, you will receive the full $1,100 from Social Security, but only $300 from your insurance company, for a total of $1,400. Similar offsets exist for other types of income, including workers' compensation, third-party settlements, and retirement benefits.
If the amount of the offset exceeds your LTD check, your LTD carrier will pay nothing, unless your policy contains a minimum monthly benefit. A minimum monthly benefit might entitle you, for example, to the greater of $100 per month or 10% of your gross monthly benefit, even if your offset is more than the LTD amount. If your LTD policy has a minimum, it should be set out in your summary plan description.
Returning to work while on long-term disability could put your benefits in jeopardy or reduce the amount you receive each month. Depending on your policy, however, this may not be true for you. If you have a "own occupation" policy, which pays you benefits if you can't work in your own occupation, you can still work without losing your eligibility for benefits.
If you have an "any occupation" plan, you won't get benefits unless you can't do any type of work because of your impairments. Accordingly, if you start working while receiving benefits under an "any occupation" plan, the insurance company will reduce your monthly payments or regard your employment as proof that you are no longer disabled. Note that many policies shift their definition of disability from the inability to perform your "own occupation" to "any occupation" after two years.
For more information, see Nolo's article on the definition of disability and other LTD policy terms.
Taxation of Long-Term Disability Benefits
In general, if the premiums for your LTD policy were paid for with before-tax dollars (as is almost always the case with an employer-provided group plan), your LTD benefits are taxed as ordinary income to you. For individual plans purchased with your own after-tax dollars, LTD benefits are not considered taxable income. If you and your employer shared the cost of the premiums, only the portion of the LTD payments attributable to your employer's premiums is taxed as income. Consult an experienced tax attorney if you're unclear about the tax implications of your benefits.
When Will My LTD Benefits Stop?
The terms of your particular policy will dictate how long your benefits continue. Although many plans pay benefits until age 65, others pay for a fixed number of years, often five or ten. If you become disabled after age 60, most plans allow you to receive benefits even after you turn 65.
Virtually all policies currently limit payments for disabilities based on mental or nervous disorders, usually to 24 months of benefits.
Failing to obtain ongoing medical treatment and returning to work may also terminate your benefits.
Maximizing Your Monthly LTD Payments
There are two common mistakes people make when filing for LTD benefits that reduce their monthly payments unnecessarily or even void their coverage entirely. Some individuals quit their jobs because they're unable to work and then try to file for LTD benefits. Unfortunately, under many group policies, disability coverage ends once the employment relationship has terminated.
Other workers ask their employers for reduced hours or a less stressful (and often lower-paying) position. Because monthly LTD payments are often calculated using the employee's pre-disability salary, transitioning to a lower-paid position or part-time role could reduce your monthly benefits significantly (because your "pre-disability" earnings will be lower than when you were working full-time or at full capacity).
Finally, many LTD policies define "disability" as the inability to perform the duties of one's own occupation, so transitioning to a less strenuous job before applying for benefits can actually make it harder to be found disabled. The insurance company will use the less strenuous job you've been doing as the standard for whether you can work.
To ensure that you both maintain LTD coverage and maximize the amount of your benefits, be sure to file your LTD claim while you are still employed at your regular occupation. Contact a long-term disability lawyer if you run into trouble.