How Much Do You Get Paid for Long-Term Disability?

Long-term disability insurance provides income replacement for individuals unable to work due to a prolonged illness or injury. The amount received depends on various factors unique to each policy and individual circumstance, including benefit calculation, policy clauses, interaction with other income, and tax implications.

Determining Your Long-Term Disability Benefit Amount

Long-term disability (LTD) benefits are calculated as a percentage of an individual’s gross income earned before disability. Common percentages range from 50% to 80% of pre-disability earnings, with 60% or 66 2/3% being frequent figures.

“Pre-disability earnings” often include monthly wages or salary, and some policies factor in additional compensation like bonuses, commissions, or overtime. Reviewing policy language is important to understand which income components are included, as this affects the base benefit amount.

Most policies include a maximum monthly benefit cap, typically ranging from $4,000 to $25,000. Group policies commonly cap at $10,000 or $20,000. For high earners, this cap can mean the policy replaces a smaller percentage of their actual income.

Benefit amounts differ between employer-sponsored group policies and individual policies. Group policies are standardized, while individual policies offer more customization, potentially providing a higher income replacement percentage or a fixed monthly benefit regardless of prior earnings.

Key Policy Elements Affecting Payments

Specific policy provisions influence the amount and duration of long-term disability payments. The “definition of disability” determines eligibility. Policies use either an “own occupation” or “any occupation” definition. An “own occupation” policy considers an individual disabled if they cannot perform their specific job duties. An “any occupation” policy requires the individual to be unable to perform any occupation for which they are reasonably suited by education, training, or experience. The “any occupation” definition can make it more challenging to qualify for continued benefits.

The elimination or waiting period is the time an individual must be continuously disabled before benefits begin. This period, typically 90 to 180 days, functions like a deductible. During this time, the policyholder does not receive benefits and must rely on other resources, such as savings or short-term disability insurance.

The benefit period specifies the maximum length of time for which benefits will be paid. This duration varies, ranging from a few years (e.g., two or five years) up to age 65, or even for life. A longer benefit period offers more extended financial protection, directly impacting the total potential payout.

Some policies include a Cost of Living Adjustment (COLA) feature, designed to increase benefit payments over time to maintain purchasing power against inflation. Adjustments may be a fixed percentage annually (e.g., 1% to 3%) or tied to an index like the Consumer Price Index (CPI). COLA inclusion can significantly enhance the real value of benefits received during long periods of disability.

A pre-existing conditions clause can impact benefit eligibility. This clause allows insurers to limit or deny coverage for conditions that existed or received treatment during a “look-back period” (typically 3 to 12 months) before the policy’s effective date. If a disability arises from such a condition within an “exclusion period” (often 12 to 24 months from the policy start date), benefits may be reduced or denied. This provision helps prevent individuals from obtaining coverage for an anticipated disability.

Interaction with Other Income Sources

Long-term disability policies often include “offset” or “integration of benefits” clauses that reduce benefits if an individual receives income from other sources. These clauses prevent an individual from receiving more income while disabled than they earned while working.

A common offset involves Social Security Disability Insurance (SSDI) benefits. Many policies require claimants to apply for SSDI; if approved, LTD benefits are typically reduced dollar-for-dollar by the SSDI amount. For instance, if an individual receives $1,400 in LTD benefits and $1,100 from SSDI, the LTD payment would be reduced to $300, totaling $1,400 from both sources.

Workers’ Compensation benefits also reduce long-term disability payments. If a disability is work-related, any Workers’ Compensation payments will usually offset LTD benefits.

Other income sources leading to offsets include state disability benefits, other private disability insurance policies, retirement benefits, or personal injury settlements. The specific types of income causing an offset are detailed within the policy’s “Other Income Benefits” or “Deductible Sources of Income” section. While these offsets reduce the amount paid by the insurer, they generally do not decrease the total combined income received.

Tax Treatment of Benefits

The taxability of long-term disability benefits impacts the net amount received. Whether benefits are taxable primarily depends on who paid the insurance premiums and if those premiums were paid with pre-tax or after-tax dollars.

If an employer pays 100% of the long-term disability insurance premiums, the full benefits received are generally taxable income. This is because employer contributions are paid with pre-tax dollars. These benefits are subject to federal income tax and, for the first six calendar months, Federal Insurance Contributions Act (FICA) taxes.

Conversely, if an individual pays the entire premium for their long-term disability policy with after-tax dollars, the benefits received are typically tax-free. This applies to most individual disability policies where the policyholder pays premiums directly.

When both employer and employee contribute to premiums, benefit taxability is proportional to each party’s contribution. For example, if an employer paid 50% of the premium, 50% of the benefits would be taxable. If an employee pays their portion of premiums with pre-tax dollars (e.g., through a cafeteria plan), those benefits are also generally taxable. Benefits are usually reported to the IRS on Form W-2 (if paid by employer) or Form 1099 (if paid by a third-party insurer).