Understanding Your Long-Term Disability Policy

Long-term disability insurance (LTD) policies provide wage replacement at a certain percentage—usually 50% to 80% of prior earnings—for covered beneficiaries with medical conditions that keep them from working. LTD policies are a popular benefit provided by employers ("group plans"), but individual plans may also be purchased on the open market.

Both group and individual policies can be hard to understand and riddled with legal jargon, strict deadlines, and exceptions piled upon exceptions. Knowing which conditions your LTD provider considers disabling, what's excluded from coverage under your policy, and who decides whether to pay your insurance claim is key in making sure that your claim is approved as quickly as possible.

How Does Your LTD Policy Define What a Disability Is?

Your policy's definition of disability can have a major impact on whether you qualify for benefits. LTD policies fall into two broad categories—own occupation and any occupation. With "own occupation" policies, you'll be considered disabled if your medical condition prevents you from performing the main duties of your usual work. In contrast, "any occupation" policies define disability as the inability to work at any other job for which you are reasonably suited.

Own Occupation LTD Policies

Own occupation LTD policies might include language such as "Disability exists when, due to illness or accidental injury, you are not able to perform, for wage or profit, the material and substantial duties of your regular occupation."

Notice that you're disabled under an own occupation policy if you're unable to carry out the duties of your own job. For example, if you're a firefighter with an own occupation LTD policy who has a back injury that keeps you from climbing ladders or carrying heavy hoses, you're eligible for benefits—even if you would be able to perform another, less strenuous job. In fact, you can often work another job under an own occupation policy, although your benefits amount may be reduced.

Any Occupation LTD Policies

Any occupation policies have narrower definitions of disability. You'll typically need to show that you're incapable of performing any job—not just your regular job—for which you are reasonably qualified based on your education, training, or experience. Using the firefighter example above, you wouldn't be disabled under an any occupation policy if you could still perform desk work even though you couldn't lift heavy objects or climb ladders as required by your usual job.

Many LTD policies switch from own occupation to any occupation after a certain period of time. Your disability benefits can be terminated either because your policy's definition of disability has become more strict (for instance, it changes from "own" to "any" occupation) or because your insurer finds that you've experienced medical improvement related to your ability to work.

Long-Term Disability Insurance Coverage Limitations

Few LTD policies are as straightforward as just determining whether you can perform your own or any occupation. Below are a few common exclusions and provisions that might limit your eligibility for disability or impose additional requirements on your continuing receipt of benefits.

• Mental conditions. Benefits for disabilities based on mental health impairments are typically capped at 24 months, though exceptions for disorders such as schizophrenia and organic brain disease are common.
• Drug and alcohol abuse. Disabilities arising from substance abuse or alcoholism may be covered only for a short time or not at all.
• Pre-existing conditions. Nearly all policies have exclusions for "pre-existing conditions," often defined as any condition for which you've received medical treatment in the previous 90 days.
• Waiting period. Your LTD policy is also likely to contain an "elimination period," a timeframe during which you're disabled but not entitled to LTD benefits. The elimination period is often three to six months and usually corresponds to the length of your short-term disability benefits.
• Duration of benefits. Some LTD policies will pay benefits until you turn 65, but others pay only for a limited number of years. Check the summary plan description to determine your policy's maximum duration.
• Social Security disability. You will almost certainly be required to file for Social Security benefits if you receive LTD. If you're approved, your insurance company will then reduce ("offset") your monthly LTD benefits by the amount you receive in Social Security.
• Taxability of benefits. Whether your LTD benefits are taxable depends on whether your premiums are paid with before-tax or after-tax dollars. If you or your employer pay your premiums with before-tax dollars, your LTD benefits are taxed as ordinary income. If you paid your LTD premiums with after-tax dollars, the benefits are generally tax-free.

What Is the Meaning of a Group vs. Individual LTD Plan?

Whether you have an individual or employer-provided group LTD policy could impact how you pursue your disability claim and your chances of being approved. Most employer-provided group plans are governed by the federal Employee Retirement Income Security Act (ERISA). ERISA outlines specific procedures that you must follow in applying for benefits and filing appeals. Individual LTD policies are contracts between the insurers and individual policyholders and are governed by state insurance law.

There are many other differences between ERISA and individual policies, including the costs of premiums, "portability" (continuation) of coverage, taxation of benefits, and process of appeals. It's important to keep these differences in mind whether you're shopping for a policy or thinking about filing a claim.

Costs of Group vs. Individual LTD Plans

Most LTD policies are provided by an employer who also pays the monthly premiums. If you don't get coverage through your employers or you want to supplement the employer-provided plan, you can purchase an individual policy. Group policies are generally less expensive but provide more basic coverage, while individual policies may be more costly but can be tailored to your specific needs and generally offer a higher quality of coverage.

Virtually all ERISA and individual plans contain restrictions on disability claims based on mental health disorders or substance abuse, often limiting payments to 12 or 24 months. If you're purchasing an individual policy and wish to be covered for conditions such as depression or anxiety, some carriers may be able to accommodate you in exchange for an increased premium.

How much you'll receive in monthly benefits may also differ between ERISA and individual policies. Group plans usually provide benefits equal to 50% to 75% of your pre-disability income, often with a cap of $5,000 or $10,000 per month. Individual policies may allow you to collect a greater percentage of your salary with a higher monthly maximum.

Portability of LTD Coverage

One of the great features of individual LTD policies is their portability—that is, their ability to travel with you from one job to the next and even to survive periods of unemployment. Group long-term disability coverage, in contrast, is terminated when your current employment ends.

COBRA regulations that may allow your health insurance to continue for a short time after you've been laid off don't apply to LTD insurance. If you try to file for LTD benefits after leaving your job, you'll probably find that you're no longer covered. This is important to remember if you're considering filing a disability claim and are having difficulty continuing to work.

Taxation of LTD Benefits

Individual policy premiums for long-term disability are typically paid for with a person's after-tax dollars and the LTD benefits are received tax-free. Contrast this with group plans, where the employers usually pay the premiums with before-tax dollars, but the LTD benefits are taxed to the recipient as ordinary income.

How to File an LTD Claim and Appeal a Denial

Group health insurance plans are governed by ERISA. Under ERISA, long-term disability insurance companies themselves decide whether you're approved for benefits, a process that frequently results in good cases being denied. Be sure to follow your insurance company's instructions for filing your initial claim to avoid having your claim denied unnecessarily.

Filing Your Initial LTD Claim

Your first step should be to request a copy of your actual policy and the summary plan description from your employer's human resources department. (Those with individual plans should send a written request for plan documents directly to the insurer.) Carefully read the policy, which should tell you what forms you need to file a claim and include instructions on how to fill them out. Becoming familiar with your policy provisions can also help you avoid common mistakes that may lead to an initial denial of benefits.

Appealing an LTD Denial

If your claim is denied, you can appeal that decision. Make sure to read your policy's rules about filing an internal appeal and take special note of all deadlines. For ERISA claims, you must exhaust your plan's internal appeals process before filing a lawsuit in federal court. This means you must first ask your insurance company to review its decision—called an administrative appeal—before you can sue. Individual LTD policyholders don't need to exhaust their administrative appeals and can go straight to filing a lawsuit.

State vs. federal court. You can sue in state court for breach of contract, negligence, bad faith, or other causes of action. Unlike ERISA cases, which are decided by a judge, individual LTD policyholders are entitled to a jury trial.

If you have a group LTD policy covered by ERISA, you'll have to sue in federal court. Pay special attention to all filing deadlines for your internal appeals, as missing even a single deadline could be considered a failure to exhaust your administrative appeals. This could prevent you from being able to sue the insurance company in federal court.

Under ERISA, federal court judges are generally limited to reviewing the administrative record and won't consider any new evidence that wasn't presented during your internal appeals, so be sure to submit all relevant evidence regarding your claim to your insurer during the course of your administrative appeal. Because individual LTD policyholders aren't required to exhaust their administrative appeals before filing a lawsuit, they're allowed to present new evidence in court.

Standard of review. The standard of review applied by courts may also be different depending on whether you have group or individual coverage. Under ERISA, the actions of insurers and plan administrators are often evaluated under an "abuse of discretion" standard—meaning that unless the insurance company's decision to deny you benefits was wholly unsupported by the evidence, or clearly incorrect, the federal judge can't overturn the decision.

Insurance carriers aren't given the same benefit of the doubt under the state laws that apply to individual policies. Instead, the state judge or jury will look to whether the insurance company fulfilled its promises to you under your LTD contract.

Money Damages

For claims covered by ERISA, the court can award you damages only for the amount of back benefits you should have received, plus interest. Individual policies, however, allow you to recover compensatory damages and punitive damages. Occasionally, the insurance company can be forced to pay your attorneys' fees.

Get Help Navigating Long Term Disability Laws

While you aren't required to have a representative when filing an LTD claim, it can be a smart idea, especially if you appeal to state or federal court. An attorney with LTD claims experience can help you navigate the administrative appeals process and "stack the record" in your favor, increasing your chances of winning. Most disability attorneys charge a fee only if you win your case, so there's little (if any) upfront cost to you, and they often provide free consultations for you to get a good sense of whether you'd like to work with them.