How Much Is Long Term Disability Per Month?

Long-term disability insurance provides income replacement when an illness or injury prevents an individual from working for an extended period. Determining the actual monthly benefit from such a policy involves understanding several variables. The final amount is not a single fixed number, but rather a calculation influenced by specific policy terms, potential reductions from other income sources, and tax implications.

Policy Elements Affecting Benefit Amount

The initial potential monthly benefit from a long-term disability policy is shaped by several foundational elements embedded within the insurance contract. A primary factor is the benefit percentage, which typically replaces a portion of pre-disability income. Most policies offer 50% to 80% of pre-disability earnings, with 60% to 70% being common.

Defining “pre-disability income” is important, as policies vary in what they include. While base salary is almost always considered, some policies may also incorporate additional compensation like bonuses, commissions, or overtime pay in their calculation.

Policies also feature a maximum monthly benefit, which caps the payout regardless of the calculated percentage of income replacement. These maximums can range significantly, with common figures falling between $4,000 and $25,000 per month.

The waiting period, often referred to as an elimination period, dictates when benefits begin after a disability occurs. Common elimination periods are 90 or 180 days, though they can range from 30 days to up to two years. This period begins on the date the disability starts, not when a claim is filed.

The policy’s definition of disability affects eligibility for any benefits, which is a prerequisite for receiving a monthly payment. Some policies use an “own occupation” definition, meaning benefits are paid if an individual cannot perform the duties of their specific job. Other policies may transition to a more restrictive “any occupation” definition after an initial period, typically 12 to 24 months, requiring the individual to be unable to perform any gainful employment.

Calculating Your Gross Monthly Benefit

Determining the estimated gross monthly benefit involves a straightforward application of the policy elements. The first step requires identifying the relevant pre-disability income, based on the policy’s specific definition of what constitutes earnings. This might be limited to base salary or could include other forms of compensation like bonuses and commissions.

Once the applicable income figure is established, the next step is to apply the policy’s benefit percentage. For example, if a policy replaces 60% of pre-disability income and an individual’s defined income was $5,000 per month, the calculated amount would be $3,000 ($5,000 x 0.60).

The final step involves accounting for any policy maximums. The calculated amount is compared to the policy’s stated maximum monthly benefit. The lower of these two figures represents the gross monthly benefit.

For instance, if the calculated benefit is $3,000 but the policy has a maximum of $2,500, the gross monthly benefit would be $2,500. If the calculated benefit is $3,000 and the policy maximum is $4,000, the individual would receive the full $3,000.

It is important to review the policy’s summary plan description to confirm these specific terms. This calculation provides the amount before any external reductions or tax considerations are applied.

Understanding Benefit Reductions and Offsets

After a gross monthly benefit is determined, various external income sources or benefits can reduce the actual payout. This concept is known as an offset, designed to prevent individuals from receiving more income while disabled than they earned while working.

Many long-term disability policies require claimants to apply for Social Security Disability Insurance (SSDI) benefits. If SSDI benefits are approved, the long-term disability payout is frequently reduced by the amount received from Social Security. For example, if an individual receives $1,500 in long-term disability benefits and is approved for $1,000 from SSDI, the long-term disability payment may be reduced to $500, resulting in a total of $1,500 from both sources. Policies may also require reimbursement of any SSDI back pay received for periods when the full long-term disability benefit was paid.

Workers’ Compensation benefits are another common offset. If a disability is work-related and Workers’ Compensation benefits are received, these amounts can reduce long-term disability payments. Many policies explicitly state that Workers’ Compensation payments will reduce the long-term disability amount dollar-for-dollar.

Other income sources can also lead to reductions. These may include state disability benefits, certain retirement plan distributions, and income earned from approved part-time work while receiving disability benefits. Insurance companies coordinate these benefits to ensure total payments do not exceed a certain percentage of pre-disability earnings.

Tax Considerations for Benefits

The taxability of long-term disability benefits significantly impacts the net monthly amount an individual receives. The key factor in determining whether these benefits are taxable is who paid the premiums and how those payments were treated for tax purposes. This is commonly referred to as the premium payer rule.

If an employer pays the entire premium for a long-term disability policy, and those premiums are paid with pre-tax dollars, then the benefits received are generally considered taxable income. These taxable benefits may be subject to federal income tax and Federal Insurance Contributions Act (FICA) taxes.

Conversely, if an individual pays the full premium for a long-term disability policy with after-tax dollars, the benefits received are typically tax-free. In situations where both the employer and the employee contribute to the premiums, the benefits are partially taxable. The portion of the benefit attributable to the employer’s pre-tax contributions is generally taxable, while the portion attributable to the employee’s after-tax contributions is tax-free.

The distinction between group and individual policies often plays a role in tax implications. Employer-sponsored group policies are frequently paid for by the employer using pre-tax dollars, making the benefits taxable. Individual policies, purchased directly by an individual, are usually paid with after-tax dollars, resulting in tax-free benefits. Taxable long-term disability benefits are reported by the payer, typically on a Form W-2 if paid directly by an employer, or a Form 1099-MISC or 1099-R if paid by a third-party insurer.