Long-term disability (LTD) payment refers to a contractual income replacement benefit that pays a specified percentage of your gross monthly earnings. It is for individuals who are unable to work due to a covered medical condition. It is neither a government benefit nor a government insurance program but rather a private or group insurance benefit based on the terms of an individual policy or a summary plan description. Most employer-sponsored LTD plans in the United States are governed by the Employee Retirement Income Security Act of 1974 (ERISA). However, privately issued policies also have riders, including the own-occupation rider. Your gross earnings, policy formulas and certain contractual limits determine how much you receive. There are also insurance carrier rules regarding deductible income, offsets, and maximum monthly benefit limits that can significantly impact the ultimate payment amount. These factors are critical in determining how much you will receive monthly and how you will plan to be financially stable during recovery. Read along to understand how these benefits are computed and what determines your ultimate payment.
How Percentages and Pre-Disability Earnings Are Calculated
Examining your disability insurance policy, you will notice that the benefit is rarely a flat dollar amount, unless you have a specific type of individual policy privately. To the great majority of employees whose benefits are provided by employer plans, the amount is a percentage of your earnings before disability. This percentage in the current insurance market is typically 50 to 80 percent of your gross monthly income.
The majority of standard group policies are inclined towards the 60 percent point. You should understand that this percentage is based on your gross income, which is what you are paid before taxes and other deductions are made by your employer. If you have a gross wage of five thousand dollars per month and you have a sixty percent replacement rate on your policy, your base monthly benefit would be three thousand dollars.
Nevertheless, the most contentious aspect to thoroughly examine any long-term disability claim is the definition of pre-disability earnings. You cannot assume that all the dollars on your paystub are included in this computation. The insurance companies have specific time frames within which they consider your average monthly income, and they usually assume the twelve months before your disability sets in.
If you had some unpaid leave or fewer hours during those twelve months, it may decrease your average earnings, which in turn could lower your monthly check. You should also take time and read the section of your policy labelled "Definitions" to determine how your carrier responds to changes in your income. It is this initial calculation that prepares all the other deductions and adjustments that will occur in the life of your claim.
The Definition of Earnings Including Commissions, Bonuses, and Overtime
Your payout is even more complicated when you have more than a base salary in your compensation package. Most professionals are accustomed to receiving commissions, performance bonuses, or regular overtime to maintain their lifestyle; however, these may not be considered covered earnings by your insurance policy.
You may discover that your policy clearly spells out pre-disability earnings as your base monthly salary, which leaves out the very bonuses that constitute a significant part of your take-home pay. To a sales professional or executive, such a difference can spell the difference between having a benefit that covers all expenses and one that creates a significant financial gap.
If your policy includes commissions and bonuses, the carrier will typically calculate an average of these values over two years to determine a consistent monthly amount. You should be prepared to provide a substantial amount of documentation, such as W-2s and comprehensive commission statements, to demonstrate that these earnings were consistent and regular. Most of the time, overtime is not paid unless it is specifically stated in your policy as part of your earnings.
When calculating your potential payout, focus on "total earnings" rather than just your base salary. When your commissions are omitted, your 60 percent benefit is only 40 percent of what you earn. This is the subtlety that causes high earners to buy additional private policies to fill the loophole caused by limiting group policy definitions.
Understanding the Maximum Benefit Caps and Monthly Limits
Although you have a high income and a generous percentage, you may reach a limit known as the maximum monthly benefit. The majority of group disability policies have a limit, which is the maximum amount that the insurer will pay, irrespective of your past salary.
As an example, a typical limit in a standard company policy is $5,000 or $10,000 per month. Assuming that you are a high-paid executive earning thirty thousand dollars a month, a sixty percent benefit ought to give you eighteen thousand dollars.
But when you have a policy limit of ten thousand dollars, the insurance company will not pay you more than that. This limit is a key consideration for professionals, as it may result in an actual income replacement rate that is significantly lower than the 60 percent promoted in the policy brochure.
These caps are usually fixed and only increase if you purchase a specific rider. In privately held individual policies, the limits can be much higher, up to $25,000 or $30,000 per month, but this comes with a significantly higher premium.
In the process of filing a claim, the insurance company will first compute your percentage-based benefit and then apply the cap to determine which one is lower. You will always receive the one with this low value.
The Effect of Offsets on Your Disability Payment
The most shocking and sometimes irritating part of long-term disability is the so-called offset. The majority of the policies are structured in such a way that the insurance company is not required to pay the entire benefit if you are receiving money elsewhere. These other sources are known as deductible income or offsets.
The most prevalent offset is Social Security Disability Insurance (SSDI). If you have an LTD benefit of three thousand dollars a month and you receive two thousand a month through the Social Security Administration, your insurance company will only pay you one thousand dollars. The insurer reduces its payment by the amount received from Social Security Disability Insurance, as permitted by the policy.
Social Security is not the only offset. Payments you receive are also usually deducted by your insurance company in workers' compensation, state disability programs, and even personal injury settlements involving the condition that made you disabled.
Some policies also offset Social Security benefits for families. For example, if your children receive dependent benefits because of your disability, the insurance company may reduce your payment by that amount.
How the Minimum Monthly Benefit Protects You
Since offsets may be so vigorous, you may find that your deductible income may be equal to or even greater than your total long-term disability benefit. In the event of this, you may fear that your insurance company will cease paying you altogether. Luckily, nearly all policies include a provision of a minimum monthly benefit.
This is to guarantee that you receive at least a small portion of the insurance company, irrespective of the amount you receive from Social Security or other sources. This minimum is usually $100 or 10% of your gross monthly benefit.
Consider this minimum benefit as a safeguard that keeps your claim alive. However, the check may be small; having an active claim is crucial, as it typically preserves other benefits, such as a waiver of premiums on your life insurance or continued eligibility for specific health benefits.
In a case where your SSDI payment is substantial in comparison to your past salary, you should ensure that the insurance company is at least paying you this amount as required by the contract. This also guarantees that if your Social Security benefits were to be terminated, your insurance company would be obliged to intervene and fully pay your calculated benefit again.
Understanding How Taxes Affect Your Gross and Net Payouts
To understand the extent to which long-term disability actually pays, you have to take into consideration the contribution of the Internal Revenue Service (IRS). Whether your disability check is taxable will depend on the manner in which the policy was paid in terms of the premiums.
If your employer paid the entire premium of your coverage and failed to report the same as taxable income, then your disability benefits will be subject to full taxation. The 60 percent benefit in this case is not the take-home pay.
You will be required to pay federal and possibly state income taxes on that amount, which would leave you with a net income that is actually between 40 and 45 percent of what you were earning before you became disabled. This can cause a significant financial shock if you have not budgeted for the tax blow.
On the other hand, when you pay the premiums by using after-tax funds, the benefits you receive are usually tax-free. This applies to individual policies that are privately held and voluntary group plans, where the premium is deducted after taxation is done on your paycheck. A 60 percent tax-free benefit in this case is what you used to receive as take-home pay since you no longer pay income tax or Federal Insurance Contributions Act (FICA) deductions on the amount.
You need to verify your pay stubs or discuss with your human resources department how your premiums were treated. This difference is the most significant consideration in determining the actual amount of money you will receive at the end of the month in your bank account.
How COLA and Catastrophic Riders Can Increase Your Payout
The underlying computation of long-term disability is aimed at compensating a part of your salary; however, some improvements in the policy can boost your compensation in the long term or in case of severe health conditions. The Cost-of-Living Adjustment (COLA) rider is one such improvement.
In the absence of a COLA rider, your disability benefit will be kept at the same dollar value throughout the length of your claim, which may be decades. In the long run, the purchasing power of that fixed check will be eroded by inflation.
A COLA rider ensures that your benefit increases annually, typically at a fixed percentage, such as 3 percent, or it may be a variable rate based on the Consumer Price Index. It is a necessary attribute for younger claimants who might be on disability until age sixty-five.
The other crucial improvement is the catastrophic disability rider. This rider applies to individuals who are severely impaired, such as those who lose the ability to perform two or more activities of daily living or who suffer from severe cognitive impairment.
If you satisfy the requirements of a catastrophic disability, the policy can pay you an extra percentage over and above your standard benefit. In some cases, your total replacement rate can be 100% of your earnings before the disability.
This additional cash will be used to help cover the expenses of home healthcare or specialized medical equipment. These are the specific riders that you need to consider in your policy, as they are not typically included in basic group plans but are commonly found in high-quality individual insurance.
How Partial and Residual Disability Benefits Are Calculated
Not all disabilities lead to complete incapacity to work. You might be in a position where you can work part-time or in another less demanding position, but your earnings have been significantly reduced.
In such situations, you are paid out based on residual or partial disability provisions. These are formulas that are meant to compensate you for a part of your benefit to compensate for the loss of earnings.
A majority of the policies consider a loss-of-income threshold, which is usually twenty percent. The insurance company will pay a proportional benefit if your disability makes you lose over twenty percent of the income that you earned before the disability.
The residual benefit is typically calculated by taking the percentage of the income you lost and multiplying it by the amount of your monthly disability benefit. For example, when you are making 40 percent of what you were making, the insurance company may compensate you forty percent of what you were receiving as the maximum disability benefit.
There are even more generous policies that will cover the entire benefit of the first six to twelve months of a partial disability to allow you time to settle down. Nevertheless, you should be cautious because specific policies have work incentive limits that restrict the combined income from part-time work and disability benefits. If your total income is more than your income before disability, the insurance company will cut down your benefit so that you are not making a profit out of your disability.
Find a Reliable Disability Claims Attorney Near Me
The exact amount you receive from a long-term disability claim in California depends on the specific language in your insurance policy. Replacing a regular salary with disability benefits involves complex calculations, including determining the benefit percentage, accounting for Social Security offsets, and considering tax implications. These complexities are often exploited by insurance carriers, who sometimes under-calculate pre-disability earnings or over-offset to reduce their monthly payments. You do not have to handle these financial and policy challenges on your own. At Leland Law, our disability claims attorneys can hold insurance companies responsible and ensure that all bonuses, commissions, and contractual riders are added to your checkbook. If you believe your long-term disability benefits were miscalculated or you are preparing to file a new claim, contact us today at 866-449-6476. Our disability claims lawyers are ready to safeguard your financial interests and ensure that your benefits are accurately calculated under your policy.
