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Getting the most out of your Long Term Disability program

July 31st, 2013

Traditionally, Long Term Disability benefits have been based on a percentage of monthly salary; for example, 65 per cent.  The LTD benefit is meant to help financially sustain your plan members who are unable to work; however, this must be balanced with a financial incentive to return to work.

Most insurance carriers cap LTD benefits at 85 per cent (all source maximum) of the pre-disability salary to provide incentive for plan members to return to active work.  Without this cap, a plan member could be financially better off while receiving LTD benefits rather than working.  However, high-income earners insured with a flat percentage LTD benefit may find that the benefit for which they are paying exceeds the benefit they will receive due to the all source maximum.  Here is an example of a plan of 65 per cent to a maximum of $6,000:

  • $10,000 salary per month x 65% = $6,000 (plan maximum)
  • Net income is approximately $5,800 for a $10,000 salary and $5,800 x 85% = $4,930
  • This means that this employee would only get a maximum of $4,930 even though he or she would be paying premium based on receiving $6,000, which leaves a shortfall of $1,070.

Solution:  Tiered Benefit Formulas

A tiered benefit formula can shorten or remove the gap between the benefit amount that premiums are based on and the amount of disability payment for non-taxable plans.  Although the tiered LTD benefit formula will calculate a lower overall benefit than the flat percentage for higher-income earners, these plan members would not be charged for a benefit that they would never be eligible to receive.

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