What Percentage Does Long-Term Disability Pay?
Understand the actual financial payout of long-term disability, from initial calculations to the factors that shape your net benefit and its duration.
Long-term disability insurance offers financial protection by replacing a portion of your income if you become unable to work due to a prolonged illness or injury. It provides a steady income stream when a disability prevents you from performing your job duties for an extended period, helping individuals maintain financial stability during challenging times.
Typical Benefit Percentages
Long-term disability policies commonly pay out a percentage of your pre-disability income, typically ranging from 50% to 70%. Some policies might offer up to 80% of your earnings, though this is less common.
Benefits usually do not reach 100% of your prior income. Insurers aim to incentivize a return to work when medically possible. The benefit amount often accounts for potential tax differences and helps mitigate the risk of fraudulent claims. This percentage represents the gross benefit before any potential deductions or offsets are applied.
Key Factors Influencing Your Payment
Several factors can influence the actual dollar amount you receive. The “pre-disability income” definition in your policy determines what earnings are included in the calculation. Some policies may consider only your base salary, while others might include bonuses or commissions.
Benefit maximums cap the maximum monthly dollar amount payable, regardless of your pre-disability earnings. For example, a policy might offer 60% of income but impose a maximum payout of $10,000 or $20,000 per month. For high earners, this cap can result in a lower effective percentage of their original income being replaced.
Coordination of benefits provisions can reduce your net payment. Long-term disability policies require you to apply for other benefits, such as Social Security Disability Insurance (SSDI) or Workers’ Compensation. Any amounts received from these sources are offset, meaning your long-term disability payment is reduced dollar-for-dollar by the amount of other benefits you receive. This ensures the combined total from all sources does not exceed a certain percentage of your pre-disability earnings, often 80%.
The taxation of benefits also directly impacts the effective percentage of income you retain. If your employer pays the entire premium for your long-term disability coverage, the benefits you receive are generally taxable. If you pay the premiums with after-tax dollars, the benefits are typically tax-free. If both you and your employer contribute to the premiums, the taxability of the benefits will be prorated based on each party’s contribution.
Duration of Long-Term Disability Payments
Long-term disability benefits are designed to provide income for an extended period, but they are not indefinite. Policies define specific benefit periods that vary considerably. Common durations include a set number of years (e.g., 2, 5, or 10 years).
Many policies stipulate that benefits can continue until you reach a certain age, commonly age 65 or your Social Security Normal Retirement Age. In rare cases, some policies offer lifetime benefits. Payments typically cease if you recover from your disability and return to work, or once the policy’s maximum benefit period is reached.