How Much Do You Get on Long Term Disability?

Long-term disability (LTD) insurance provides income replacement if you become unable to work due to a qualifying illness or injury. This coverage helps manage living expenses when your primary income ceases. The amount you receive from a long-term disability policy varies significantly, depending on factors outlined in your insurance agreement. Understanding these variables is important for grasping the potential financial support available.

How Long-Term Disability Benefits Are Calculated

Long-term disability benefits are generally determined as a percentage of your pre-disability gross income. Common percentages range from 50% to 66.67% of your earnings before taxes and deductions. This percentage replaces a portion of lost wages.

For example, if your policy offers 60% of your pre-disability gross income and you earned $5,000 per month, your calculated monthly benefit would be $3,000. Policies frequently include a maximum monthly benefit cap, such as $5,000 or $10,000. These caps can limit the payout, even if the percentage calculation would yield a higher amount.

The definition of “pre-disability income” typically includes your base salary. Depending on the policy, it may also encompass other forms of compensation like commissions, bonuses, or overtime pay. Clarify with your insurer what types of income are included, as this directly impacts your potential benefit amount. Policies also define disability, often starting with an “own occupation” period where you cannot perform your specific job. This transitions later to an “any occupation” standard where you cannot perform any job for which you are reasonably qualified.

Key Factors Influencing Your Benefit Amount

Several factors can adjust the final payment you receive. A waiting period, also known as an elimination period, is common in most long-term disability policies, typically ranging from 90 to 180 days. During this period, no benefits are paid.

Offsets for other income sources can reduce your long-term disability benefit. Policies frequently reduce your LTD benefit dollar-for-dollar by payments received from sources like Social Security Disability Insurance (SSDI), Workers’ Compensation, or state disability benefits. For instance, if your calculated LTD benefit is $3,000, but you also receive $1,500 from SSDI, your LTD payment would be reduced to $1,500.

Some policies may offer a Cost of Living Adjustment (COLA) or inflation protection rider. This can increase your benefit payments over time, helping to maintain purchasing power against inflation.

Policy riders can modify your benefit. A future purchase option allows you to increase coverage without additional medical underwriting. A residual disability rider permits partial benefits if you return to work part-time but still experience income loss due to disability. Group policies provided by employers often have standardized benefit percentages and caps, which may be more restrictive than individual policies.

Taxation of Long-Term Disability Benefits

The tax implications of long-term disability benefits determine the net amount you receive. Taxability primarily depends on who paid the policy premiums. If your employer paid 100% of the premiums, the benefits are generally considered taxable income by the Internal Revenue Service. Payments will be subject to federal and potentially state income tax, similar to wages.

If you paid 100% of the premiums with after-tax dollars, the benefits are generally tax-free. This results in a higher net benefit amount compared to a taxable policy.

When premiums are split between the employer and employee, benefits are partially taxable. The portion attributable to the employer’s contributions is typically taxable, while your after-tax contributions are tax-free. For example, if your employer paid 70% of the premiums and you paid 30% with after-tax dollars, then 70% of your benefit would likely be taxable.

Benefit Duration and Cessation

The duration of your long-term disability benefits significantly impacts the total financial support you receive. Policies specify a maximum benefit period, which can vary widely. Common durations include two years, five years, or extending until a certain age, such as 65 or 67, often aligning with normal retirement age. Some policies may offer benefits for life, though these are less common.

Several circumstances can lead to the cessation of long-term disability benefits. If you medically recover from your illness or injury and are no longer considered disabled under your policy’s terms, benefits will stop.

Benefits also cease once you reach the maximum benefit period specified in your policy. For example, if your policy has a five-year benefit period, payments will end after five years, regardless of your medical condition. Many policies terminate benefits when you reach your normal retirement age.

If you no longer meet the policy’s definition of disability, your benefits may be discontinued. Returning to work, even part-time, can also impact your benefits. Depending on your policy’s provisions for residual or partial disability, your benefits might be reduced or eliminated if your earnings exceed certain thresholds.

Citations

Internal Revenue Service. “Taxable and Nontaxable Income.” Publication 525.
Internal Revenue Service. “Social Security and Equivalent Railroad Retirement Benefits.” Publication 915.