What is Long Term Disability (LTD)?

Long Term Disability (LTD) provides a monthly source of income in the event that an employee is unable to perform the duties of their role, and meets the carriers definition of disabled. This provides an essential income during a difficult time in the employees life, ensuring obligations such as mortgages and monthly bills can be met.

The LTD benefit may be considered less important by employees than a high utilization benefit such as Drugs or Dental coverage, but it is instrumental in protecting the long term financial wellbeing of employees.

LTD components:

There are many components of the LTD benefit. The following is not intended to be an exhaustive list, rather these are the most common components:

Volume:

How much the employee is paid while they are off on disability. 66.67% of their pre-disability earnings is a typical amount. Higher salary %’s create higher risk, as the disabled employees income on disability will be comparable to when they were working (particularly if the benefit is non-taxable), which potentially makes it more difficult to return them to work.

Graded schedules can also be used to calculate an LTD volume. These are useful for classes of high income employees as they help to avoid a situation where an employee is paying for LTD amounts that they may not be able to receive due to the all source maximum (see below).

Note that other sources of income may be included in the volume calculation upon request. These can include annual bonuses, commissions and dividends. There may be additional terms and conditions when including these sources, for example if commissions are included the amount may be calculated using an average of the previous 2 or 3 years commissions, to help to smooth out any variability.

Taxable Benefit:

Whether or not the LTD benefit payout amount is taxed. This can have a major impact on the amount of the monthly benefit the employee receives. Note that if the employer pays any portion of the LTD premiums then the LTD payment is automatically taxable.

Termination Age:

The age at which the LTD benefit ceases to be paid. 65 is the standard LTD termination age. Note that many carriers will terminate LTD coverage when an employee reaches age 65 minus the elimination period, so that the employee is not paying for an LTD benefit they will never be able to claim.

Elimination Period:

How long an employee has to be unable to work until the LTD benefit starts to provide payments. This number is expressed in weeks. 17 weeks is the most common option as this integrates with Employment Insurance (EI). If the group also has Short Term Disability it is standard practice to align the LTD elimination period with the STD Benefit duration to ensure there is no gap in coverage.

Non-Evidence Maximum:

The Non-Evidence Maximum (NEM) is the amount of LTD coverage a carrier will automatically provide to all employees in the group that are eligible for LTD. Any LTD coverage in excess of the NEM will typically need to be medically underwritten on an employee by employee basis. Higher NEMs are therefore a benefit as it will ensure more employees in the group have adequate LTD coverage. The size of the group and the average LTD coverage amount are the two factors typically used by insurers to determine the LTD NEM, with larger groups and higher average LTD coverage amounts receiving larger NEMs. Note that some carriers may base their NEM’s on the number of employees with LTD, rather than the overall size of the group. 

Maximum:

The maximum monthly amount of LTD benefit that will be paid out. This number only affects employees who’s volumes are above the monthly maximum. For example, if the benefit is 66.67% and the maximum LTD benefit is $1500 a month, an employee earning $20k a year would receive around $1100 of monthly benefit and would see no impact from the LTD maximum. An employee earning $50k a year would be eligible for almost $2800 a month of LTD benefit, but would only receive $1500 due to the LTD maximum.

Own Occ Period:

Initially an employees definition of disability will be based on their own occupation (own occ). At the end of the own occ period, if the employee is still disabled their claim will be reassessed based on their ability to do any occupation. Conditions apply, for example the occupation must be one that the employee is reasonably qualified to perform by education, training or experience. 2 years is the standard Own Occ period. 5 years and to age 65 own occs may also be available upon request, but longer own occ periods increase the risk exposure of the group and so may come with an increased rate or may not be available to all industries. 

Benefit Duration:

This determines how long the LTD benefit will continue to be paid. To age 65 is the most common option, but other options such as 2 or 5 year benefit durations can also be requested. 

Cost of Living Adjustment:

For disabilities that last for several years, inflation can diminish the ongoing value of the LTD payments. Cost of Living Adjustment (COLA) is an optional add on to the LTD benefit that can be used to reduce the impact of inflation. COLA indexes the disability payment against the Consumer Price Index (CPI). There is typically a limit as to how much COLA will increase the annual disability payment. 

All Source Maximum:

The purpose of the all source maximum is to ensure that an employee on disability does not receive comparative or more income than their pre-disability earnings, thus removing the financial incentive to return to work. The all source maximum is typically around 85% of an employees pre-disability income. If the LTD benefit is taxable all source is 85% of pre-disability gross earnings. For non-taxable LTD benefits, the all source maximum is usually based on 85% of after-tax earnings.

Other sources of income are often referred to as offsets. Some examples of direct offsets are if the disabled employee was injured at work and is eligible for workers comp, or is receiving income from an auto insurance plan, income from government sources such as CPP/QPP etc.

Continuation of benefits:

Unlike other benefits, Disability benefits continue to be paid to a disabled employee even in the event the group contract is terminated or moved to a different carrier. This ensures a disabled employee doesn’t lose their disability income. Note that the disabled employees other benefits may move to the new carrier, for example their EHB and Dental coverage.

Waiver of premium:

LTD plans often include a waiver of premium benefit. This means that if a disabled employee is approved for LTD benefits, the LTD premiums for that employee are waived while the employee is receiving LTD benefits.