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Victor Peña Nov. 30, 2021

According to a study done by the Bureau of Labor Statistics (BLS), the number of employees in private industry purchasing long-term disability (LTD) insurance has increased over the years.

If you’re on long-term disability, you likely are receiving a monthly benefit tied into a percentage of what you earned on your job before you became disabled. The average is generally around 60 percent, but it may go as low as 50 percent or as high as 70 percent, depending on your policy.

The question is: how long will these benefits last? Some policies require you, after a year or two, to accept “any occupation” that your disability allows you to do, while in the beginning the insurer based your benefits on your inability to perform the duties of “your occupation.”

Another issue faced by those on LTD benefits is the requirement for frequent medical reviews and doctor’s visits to justify continuing the benefits. Still another concern by those on LTD is that, with reduced income, how can they pay off all the loans or bills they have due?

The answer to these questions and predicaments could be to negotiate with the insurance company for a lump sum payment, or buyout.

How Much Does Long-Term Disability Pay?

An LTD policy will generally cover about 60 percent of your previous wages, though policies may also cap the monthly amount at $5,000 or $10,000. Much depends on what type of LTD coverage you have. If you participated in a group plan at work, paid for by the employer, the average is 60 percent.

An individual policy purchased outside of work, however, may have more generous terms because you can tailor the policy to your needs, at least to some extent. A group policy provides the same level of benefits for everyone. A private policy also has the benefit of being portable. You can take it from job to job.

Disability insurance carriers for both group and individual plans include Hartford, Unum, MetLife, Cigna, and Lincoln Financial, and are among the largest of those in the market.

Cost of Living Adjustments

Inflation in 2021 has become a major topic, and recently the Social Security Administration (SSA) announced an across-the-board increase in benefits of 5.9 percent for 2022. Your LTD policy may or may not include provisions for a cost-of-living adjustment (COLA). Generally, a policy purchased at work will either include or not include a COLA. so you need to check. A private disability insurance plan will usually offer COLA as a rider that you can purchase.

Insurers use different formulas for paying cost-of-living increases. Some pay a fixed yearly interest increase of perhaps 3 percent that will remain unchanged throughout the length of your benefits. Others may tie increases to a third-party index, such as the Consumer Price Index (CPI) like the SSA does. In doing so, they may also cap yearly increases at maybe 5 or 6 percent. 

Offsets to Your LTD Benefits

Income and benefits from other sources may impact your LTD benefits. These are called offsets. Usually, an offset will result in your monthly benefits being reduced, but sometimes a policy will call for a lump-sum offset if, for instance, you win a third-party lawsuit over your disability. The insurer could demand you pay back part or all of your benefits received.

The types of offsets generally affecting LTD policies include, but are not necessarily limited to, the following:

  • Social Security Disability Benefits (SSDI) or Supplemental Security Income (SSI)

  • Workers’ compensation benefits

  • State short-term disability benefits

  • Retirement benefits

  • Veterans Affairs (VA) benefits

  • Sick pay accrued while working and paid while out on disability

  • Third-party settlements or lawsuit awards

Tax Implications

Generally speaking, if your employer paid for your LTD policy and you contributed nothing from your after-tax wages, your benefits will be taxable. If, on the other hand, you purchased your policy with your own after-tax money, the policy benefits will not be taxable. 

On a split group policy— you paid part and the employer paid part—only the portion paid for by the employer is taxable. For example, if you paid 30 percent of the premium, and the employer 70 percent, then 70 percent of your benefits would be taxable.

The Buyout: An Alternative to Monthly Benefits

If you’re someone who doesn’t want the hassle of repeated medical tests and doctors’ visits, or you need more money more quickly, you can always negotiate with the insurance company for a lump-sum settlement, or buyout. The caveat here is that, even if your condition worsens, you cannot go back and request a re-continuance of monthly benefits.

If you would like to pursue this option, you should work with a qualified and experienced LTD attorney.