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Depending on your policy, your long-term disability (LTD) plan will typically pay a base payment that's between 50% and 80% of your "pre-disability earnings," up to a maximum. (Here are some tips on understanding your long-term disability policy.)
Usually your pre-disability earnings consist solely of the monthly wages you were earning right before you became disabled, but some policies factor in other forms of compensation such as bonuses, commissions, and overtime.
All LTD plans have a maximum monthly payment, which can range in between $4,000 per month to $25,000 per month.
Read your policy's summary plan description or check with the human resources (HR) department at your company for the specifics of your plan. Also, ask your claims handler for your earnings calculations to make sure your pre-disability earnings were calculated properly.
If you've been approved for benefits, you can expect your benefits to increase by 1% to 3% each year if your policy contains a cost-of-living adjustment (COLA) provision. The COLA may be part of your basic coverage or offered as an optional rider to your plan, which you or your employer might have added on.
A COLA provision is usually indexed to a well-known measure of inflation, such as the Consumer Price Index (CPI).
Factors that can lower your LTD amount include other benefits or earned income you're receiving and whether your benefits are taxable.
Virtually all LTD policies require you to file for Social Security disability, because LTD insurance companies can offset your Social Security disability benefits against your monthly LTD payment. The offset works like this: If you receive $1,400 in LTD benefits and are approved for $1,100 from Social Security, you will receive the full $1,100 from Social Security, but only $300 from your LTD insurance company, for a total of $1,400.
Similar offsets exist for other types of income, including workers' compensation, third-party personal injury settlements, and retirement benefits.
If the amount of the offset exceeds your LTD check, your LTD insurance company will pay nothing, unless your policy contains a minimum monthly benefit. A minimum monthly benefit might entitle you, for example, to the greater of $100 per month or 10% of your gross monthly benefit, even if your offset is more than the LTD amount. If your LTD policy has a minimum, it should be set out in your summary plan description.
Returning to work while on long-term disability could put your benefits in jeopardy or reduce the amount you receive each month. Depending on your policy, however, this might not be true for you. If you have an "own occupation" policy, which pays you benefits if you can't work in your own occupation, you can still work without losing your eligibility for benefits.
If you have an "any occupation" plan, you won't get benefits unless you can't do any type of work because of your impairments. Accordingly, if you start working while receiving benefits under an "any occupation" plan, the insurance company will reduce your monthly payments by the amount you're earning, or worse, will regard your employment as proof that you're no longer disabled.
Note that many policies shift their definition of disability from the inability to perform your "own occupation" to "any occupation" after two years.
In general, if the premiums for your LTD policy were paid for with before-tax dollars (as is almost always the case with an ERISA employer-provided group plan), your LTD payments will be taxed as ordinary income to you.
For individual plans purchased with your own after-tax dollars, LTD benefits aren't considered taxable income.
If you and your employer shared the cost of the premiums, only the portion of the LTD payments attributable to the premiums your employer paid is taxed as income. Consult an experienced tax attorney if you're unclear about how your payments will be taxed.
The terms of your particular policy will dictate how long you can collect long-term disability payments. Although many plans pay benefits until age 65, others pay for a fixed number of years, often five or ten. If you become disabled after age 60, most plans allow you to receive benefits even after you turn 65.
Virtually all policies currently limit how long you can receive payments for disabilities based on mental or nervous disorders, usually to 24 months of benefits.
Failing to obtain ongoing medical treatment and returning to work may also terminate your benefits.
There are two common mistakes people make when filing for LTD benefits that reduce their monthly payments unnecessarily, or even void their coverage entirely. Some individuals quit their jobs because they're unable to work and then try to file for LTD benefits. Unfortunately, under many group policies, disability coverage ends once the employment relationship has terminated.
Other workers ask their employers for reduced hours or a less stressful (and often lower-paying) position. Because monthly LTD payments are usually calculated using the employee's pre-disability salary, transitioning to a lower-paid position or part-time role could reduce your monthly benefits significantly (because your "pre-disability" earnings will be lower than when you were working full-time or at full capacity).
Finally, many LTD policies define "disability" as the inability to perform the duties of one's own occupation, so transitioning to a less strenuous job before applying for benefits can actually make it harder to be found disabled. The insurance company will use the less strenuous job you've been doing as the standard for whether you can work.
To ensure that you both maintain LTD coverage and maximize the amount of your benefits, be sure to file your LTD claim while you are still employed at your regular occupation. Read more about mistakes to avoid when filing a long-term disability claim and consider contacting a long-term disability lawyer if you run into trouble.