If you have long-term disability (LTD) insurance and can no longer work because of a disability, the insurance company will pay you a percentage of the salary or wages you earned before becoming disabled. Most people have group LTD coverage provided through their employers (and regulated by ERISA), but you can buy your own individual LTD policy directly from an insurance company.
No matter where you get your insurance, LTD coverage provides an important safety net if you can't work for a prolonged period due to injury or illness. Read on to learn what factors can affect how much your long-term disability plan will pay.
The exact amount you'll receive depends on the terms of your policy. Most LTD plans will pay between 50% and 80% of your pre-disability earnings, up to a maximum benefit amount—usually between $4,000 and $25,000 per month.
LTD policies calculate your benefits based on the gross wages (pre-tax income) you were earning right before you became disabled. Some plans include all types of compensation in the benefit calculations, such as:
A few LTD policies will simply provide you with a fixed monthly amount that doesn't take your salary into account.
Check your policy's summary plan description or speak with your company's human resources department for specific information about your LTD plan limits and how benefit payments are calculated.
Additional factors can affect how much you can receive in LTD benefits. Your payment can be reduced or increased by things like:
If you're still capable of working but can't earn as much as you did before your injury or illness, your LTD plan might pay you less. Under some plans, partial disability benefits are paid to those who can still earn between 20% and 80% of their previous salary. With partial disability, your monthly LTD payment will be reduced in proportion to the amount of work you can still do.
But if you can only earn a small fraction of your previous salary—say 10-15%—you'll usually receive the full LTD benefit amount.
Occasionally an LTD policy will have an annual cost of living adjustment (COLA) as part of its basic coverage. More often, the COLA is an optional rider you can purchase for an additional 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 by 1-3% a year for as long as you receive long-term disability benefits.
If you've been approved for long-term disability, most policies state that you must apply for Social Security disability benefits if you haven't already done so. Your LTD insurance company might hire an attorney to represent you in your Social Security case. If Social Security finds you're disabled, your LTD benefits are usually reduced by the monthly amount you receive in Social Security.
If you're approved for Social Security, you might receive a substantial amount of back pay (covering the time you had to wait for a decision on your disability claim). If you do, you might have to pay some or all of those benefits to your insurance company based on the Social Security offset. Being able to recover some of the benefits paid to you explains why most insurance companies require LTD recipients to file for Social Security disability benefits.
Many LTD policies also have offset provisions for workers' compensation, retirement benefits, and lawsuit settlements.
You might wonder whether you'll have to continue paying your LTD insurance policy premiums if you get approved for long-term disability benefits. Because most LTD policies contain a "waiver of premium" clause, you usually don't need to keep paying premiums if you receive LTD.
Check your policy to be sure. Some don't include the waiver unless you pay for a rider. If there's no waiver and you stop paying your premiums, your LTD policy can be canceled, and your benefits stopped.
The question of whether your LTD benefits are taxable is somewhat more complicated. But it basically comes down to two factors:
In general, most "group" LTD plans (like those offered by employers and professional associations) are paid for with pre-tax dollars from the employer or through a cafeteria plan payroll deduction (using pre-tax income). Any LTD benefits received from these plans are treated as taxable income.
In contrast, most individual plans (those you purchase yourself) are bought with after-tax dollars, so any resulting benefits aren't taxed.
What if your employer paid part of the premium, and you paid part of it using money you reported as income (without a cafeteria plan)? In that case, only the portion of LTD benefits that you receive that's due to your employer's payments is taxable.
If your LTD insurance company provides short-term disability insurance, you won't begin receiving long-term disability benefits until your short-term coverage expires. 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 long-term coverage does.
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 only full-time employees are eligible.
The length of time you'll receive benefits can vary widely depending on your policy terms. Some plans pay benefits for a fixed number of years (usually two, three, five, or ten), while others will provide payments until you reach retirement age or even longer.
Note that some LTD policies have a 24-month limitation on benefits based on specific medical conditions, such as:
And some LTD policies change the way they define "disabled" after 24 months. Most LTD policies will initially allow you to qualify for benefits because your illness or injury prevents you from being able to do your current job. But after 24 months, you might only continue to be eligible if your condition keeps you from doing any kind of work (this is called an "any occupation" provision).
Learn more about when your LTD benefits could be terminated.
Updated July 12, 2023