Do You Really Understand Your Employee Long Term Disability Insurance Benefits?

According to actuarial tables, a 35 year old has a 50% probability of being disabled for at least 90 days and the average duration of disability is an incredible 3.5 years. The probability decreases slightly as you get older, but the average duration increases. The probability of a 50 year old being disabled for at least 90 days is 33%, but the average duration is almost 5 years. 

Based on the probability of having a claim, I think you’ll agree that disability insurance is a good idea, but if you believe your employee Long Term Disability (LTD) plan offers plenty of protection, please read on. 

Here are a few things you should know about employee LTD plans

The overall benefit maximum may be less than you need

If your annual income is $250,000, you should be entitled to approximately $9,000 of monthly disability benefits tax-free. A $400,000 income would qualify you for a monthly tax-free benefit of approximately $12,000. Unfortunately, many employer LTD benefit plans don’t offer maximums that come close to covering these higher incomes. 

“Own Occupation” definitions in LTD contracts are NOT the same as individually owned policies

The core of any disability contract is what defines your eligibility for a benefit. Most LTD contracts will state that you are only considered disabled if “you are unable to perform the essential duties of your Own Occupation” and not working elsewhere. This typically switches to “Any Occupation for which you are reasonably qualified for by training or experience” after 2 or 5 years on claim. 

Unlike LTD, individually owned Disability Insurance (DI) policies with an Own Occupation rider will not change definitions for the duration of the claim (to age 65). In addition, the benefit can be very specific to your type of practice. 

A litigator that suffers from severe anxiety attacks while appearing in a court room is prevented from working in his Own Occupation. Disability payments would still be made even if this lawyer is able to work in a different area of law or in a completely different occupation as long as he remains disabled for his Own Occupation as a litigator. 

Unfortunately, most LTD contracts would not consider this lawyer disabled under their Own Occupation definition unless he was unable to perform his job as a lawyer and not working elsewhere. 

Your LTD may not provide benefits if you can work part-time or full-time, but at a reduced income.

If you are able to return to work on a part-time or even full-time basis, but your disability prevents you from earning a significantly portion of pre-disability income, you may have a Partial or Residual claim. While these claims are covered by most DI policies for professionals, they are not typically covered by standard LTD contracts.

A Partial Disability benefit provides coverage to someone that suffers a total disability, but is then able to work in a reduced capacity. Typically, benefits are payable if the individual has a loss of earning capacity exceeding 15- 20% due to their disability. 

A residual disability benefit provides a monthly benefit in proportion to lost income. This recognizes the fact that returning to work may be gradual and you may require an income supplement while you get back on your feet. 

Other differences

I will attempt to address other differences between LTD and DI in a future blog. In the meantime, here’s a list of items I hope to cover:

• The All Source maximum: the maximum your LTD benefit will allow you to collect while on claim when all other sources of income are considered
• Benefit offsets: other sources of income that directly or indirectly reduce your LTD benefit
• Lack of LTD contractual Guarantees
• Loss of LTD benefit if you leave your employer
• When LTD benefits are taxable
• LTD and a lack of protection against inflation

Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. If you want to learn more before speaking to an insurance agent, the Canadian Bar Insurance Association offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com.