Employee Life and Disability Insurance

Long-Term Disability Insurance

Long-term disability insurance provides income replacement for an extended time period. It is most commonly employer-provided, but it can be purchased individually.

Here’s how it works: If the insured has both a short-term disability and a long-term disability plan, the short-term disability benefit payments will be paid after the required waiting period following the onset of a disability and through the benefit period, which typically last three to six months. After the short-term disability benefit runs out, the long-term disability benefit kicks in. The long-term disability benefit provides a certain portion of working income - commonly 50%, 60% or 66 2/3% for five years, to age 65, or even for life, depending on the plan.

Whether or not you pay the premiums on the long-term disability policy makes a big difference when tax time comes:

• For individual policy holders, premiums are paid with after tax money, and the benefit is tax-free.
• If an employer pays the premiums, it is probably with pre-tax money, which makes the benefit taxable.

The goal for both the insurance company and the employer is to get the injured person back to work. Insurers and employers often work together to achieve this goal. They want the injured person to be recovered, working and productive. Insurance companies and employers stand to realize considerable savings if the benefit recipient is back in the workplace sooner rather than later. Some insurance companies go so far as to give the employer a group-policy premium cut as an incentive to allow the injured employee to return to work part time while still partially disabled.

Compromises

If a disability is partial, the injured person can probably still work. However, they may not be able to work in their previous position. A long-term disability policy may pay more if the insured chooses to accept a lower-paying position.

Let’s take a look at an example:

Amelia works as a loader for a shipping company. She makes $46,000 a year. Amelia suffers a severe break in her back in a boating accident. Her long-term disability policy pays 50% of her $46,000 salary. Unfortunately, Amelia doesn’t recover sufficiently to return to her former position. She has to take a receptionist position where she makes only $32,000. Her long-term disability policy now pays 50% of her receptionist salary.

But it’s not a bad deal for Amelia, and here’s why:

After Amelia’s injury, she collected $23,000 from her long-term disability policy, spread out in monthly payments. Now, Amelia makes $32,000 at her new job and collects $16,000, 50% of $32,000, from her long-term disability policy. So, she receives an income a little higher than before the accident.

Something else to consider is that if the spouse of an injured person is forced to return to work, some insurers will compensate for child-care costs. It is always prudent to understand what a particular policy covers.