What You Need to Know About Long-Term Disability Plans

Long-term disability (LTD) insurance is an essential component of overall healthcare coverage, but many employees don’t have it or don’t think they need it. When it comes to planning for the future, however, LTD could be critically important to financial and physical health.

A long-term disability plan covers the worker in the event they are too ill or with too bad of an injury to work. These plans provide financial support with income replacement for time off. LTD covers serious illness or injury, neither of which have to be job-related. If the employee is unable to report to work, LTD coverage provides a paycheck that can help meet their financial obligations.

Buying LTD coverage

The price point for these plans runs about 1 to 3% of annual salary. For an employee who earns $50,000 per year, coverage could run between $60 to $150 per month.

For most American workers, long-term disability coverage is a small expense that could mean financial solvency in the future. The price point for these plans runs about 1 to 3% of annual salary. For an employee who earns $50,000 per year, coverage could run between $60 to $150 per month.

Factors that impact the cost of coverage vary. For large employers with many staff members in a group plan, there may be a single price point for all employees, or a varying scale based on age. For smaller groups, or employees who purchase plans individually, 4 issues impact cost: age, gender, occupation, and current health status.

Younger workers will see a lower price point for coverage than older staff members, but young men pay about half the cost women do. The older men get, however, the higher the price range for coverage.

Occupation factors into cost as well. A high-risk job or one that requires more physical activity will see higher premiums than those of an office worker. An individual’s health status is the next major factor. A healthy worker will see a lower price point than someone with a history of disabling illnesses or injuries.

What is a disability?

While there may be fine print in each policy, there are some broad guidelines to what constitutes a disability under most LTD plans. Workers generally need to be totally disabled to be eligible for payments. This means the employee can no longer perform the duties of their occupation due to the illness or injury to qualify.

Workers generally need to be totally disabled to be eligible for payments. This means the employee can no longer perform the duties of their occupation due to the illness or injury to qualify.

Some policies have a “partial disability” provision. This could allow payments if the worker can no longer work in their original occupation, but can still work at another job. An example might be a skilled tradesperson who loses a limb in an accident: they may no longer be able to work in their field, but could find less lucrative work elsewhere. Generally workers who are still on the payroll, performing light or partial duties, for example, are not eligible for LTD payments.

How is disability verified? 

When an employee applies for long-term disability payments, they must provide evidence of their illness or injury from the treating physician. The carrier’s claim’s administrator will require proof of the disability and will request all medical records relating to the condition: lab test results, X-rays, examinations, and clinical notes, etc. The carrier may also require the employee undergo a second medical opinion by an independent physician.

While the claim is pending and even after approval, most carriers require ongoing treatment in the hope that the claimant’s condition improves enough to allow for return to work. Failure to comply with any requirements from the carrier could result in an exclusion of the claim.

What will LTD pay?

If you buy LTD with pre-tax dollars, or if the employer pays a part of the monthly premium, long-term disability payments will be considered taxable income under IRS guidelines.

Depending on the coverage purchased, policyholders can expect 60% to 80% of recent monthly salary as an LTD payment. For workers who purchase coverage with post-tax dollars, most disability insurance payments are not taxable income. If you buy LTD with pre-tax dollars, or if the employer pays a part of the monthly premium, long-term disability payments will be considered taxable income under IRS guidelines.

Unlike short-term disability (STD) coverage, LTD can be paid for years. STD plans generally extend 1 to 2 years, but LTD can range from 2 years through retirement (when workers are eligible for Social Security). If the claimant becomes eligible for Social Security Disability payments, the private insurance coverage will be reduced or terminated once federal payments become effective. If the employee recovers and returns to work, the coverage will end.

There may be a waiting period to receive payments for LTD, as well. This “elimination period” is the amount of time employees wait to become eligible for disability payments. Generally, these run from 30 to 90 days after the first premium payment is received. But there may be other exclusions.

What do LTD policies exclude?

Most LTD policies have pre-existing condition exclusions. These exclude an injury or illness that was diagnosed and/or treated within 90 to 180 days before coverage began. Pre-existing medical condition claimants may have to wait as long as 1 year to qualify for coverage, if they qualify at all.

Depending on the policy, some LTD coverage has specific exclusions for illnesses or injuries. These may include pre-existing conditions, specific diseases, drug or alcohol-related conditions,  or workplace accidents. Additionally, some policies include limitations on the length of coverage they will provide for some conditions, including alcoholism, drug abuse, or some mental health issues. Check the fine print of the policy to determine what LTD cover and what it doesn’t.

LTD and other insurance

If approved for LTD payments, most insurers will require employees to file for Social Security Disability payments, as well. Since Social Security Disability payments can take as long as 18 months for approval, carriers may require claimants to file for the benefit as soon as possible as a condition of receiving payments. LTD carriers can offset the amount paid to workers who receive benefits from Social Security. Some carriers will even hire a disability attorney to represent the worker for their Social Security claim.

For workers injured on the job, the LTD carrier may also require workers’ compensation insurance claims. Any workers’ comp payments will offset the amount due from the long-term disability plan. Workers who fail to file requested claims from the LTD carrier, either for Social Security or workers’ compensation, may be denied coverage.

LTD coverage and payments could be crucial for employees to meet their financial obligations in the event of a debilitating illness or injury. These policies offer a relatively low cost option to keep an income stream for the future.