Long term disability (LTD) benefits typically contain the following characteristics:
- Benefits are payable after the expiration of a qualifying period in which the employee is typically receiving benefits under a salary continuance plan, short term disability (STD) plan, or employment insurance
- Definitions of disability are tied to the employee’s ability to perform their own job or any job
- The monthly LTD benefit is a percentage of pre-disability earnings
- The benefit period ends at age 65
LTD benefit costs are driven by the industry, the volume of insurance, the qualifying period and the definition of disability.
Both short term disability and long term disability plans have a qualifying period (also called a waiting period or elimination period). Typical qualifying periods for STD are seven days for illness or the first day if due to an accident or hospitalization. These short qualifying period help reduce administration for claims of really short duration.
The qualifying period for LTD usually complements the benefit period of the salary continuance or STD program. Qualifying periods for LTD usually range from four months (equivalent to the duration of Employment Insurance) to 52 weeks. More recently insurance companies and health management companies have been involved in early intervention sometimes getting involved in a claim in the first few days of absence. Early intervention often results in reducing the amount of STD claims that become LTD claims.
Definition of Disability
There are two different definitions of disability (the specific wording is provided below):
- Any Occupation: An employee is considered to be totally disabled if a medically determinable physical or mental impairment due to injury or illness prevents them from performing the regular duties of any occupation for which they are suited or may reasonably become suited to perform based on education, training and experience
- Own Occupation: An employee is considered to be totally disabled if a medically determinable physical or mental impairment due to injury or illness prevents them from performing the regular duties of their occupation
Typically, insurance contracts stipulate the “own occupation” definition for the first 24 months of disability and then the “any occupation” definition thereafter.
Partial and Residual Disability
- An employee who qualifies for total disability benefit and is able to work in a reduced capacity can apply for partial benefit
- Benefits are payable if, due to reduced earnings capacity, the loss of income exceeds a specified percentage (usually 15% to 20%) compared to the employee’s indexed pre-disability earnings
- Benefit amount varies depending on the percentage of loss of income
- The disability period must be at least equal to the initial assessment period (usually the 2-year own occupation period) before an employee can apply for residual benefits
- Benefits are payable at a specific percentage of insured earnings if an employee suffers a loss of income because of the disability that prevents them from being fully employed
- Benefit amount is calculated according to a specific percentage. Benefit is reduced only if the employee’s income from all sources stipulated in the group contract, including the residual benefit, exceeds 100% of the employee’s indexed pre-disability earnings
Definition of Earnings
The amount of the long term disability benefit is linked directly to the employee’s pre-disability earnings. Depending upon the tax status of the benefit, these will either be gross (pre-tax) or net (after-tax). Remember, taxability is dependent on who pays the premium (if the employee pays then the benefit is tax free; if the employer pays then the benefit is taxable)
Gross earnings are defined as regular earnings and can include bonuses, commissions, and overtime pay depending on the benefits plan. If bonuses, commissions or overtime pay are included in the benefit, the insurance carrier will typically take average earnings over two years to calculate the benefit amount.
Net earnings are defined as gross earnings less income tax deductible.
Insurance companies assist individuals in returning to the workplace, and therefore, most LTD plan include a provision for tracking recurrent disability. This provision in the insurance contract takes into consideration an individuals who tries to return to work but who, due to a recurrence of the disability, cannot function in their regular job. In this case there are two situations in which the insurance carrier will waive the recommencement of the qualifying period:
- During the qualifying period if an individual returns to work on a full-time basis and within 14 to 30 days, again becomes totally disabled due to the same or related disability the qualifying period will be waived and the individual will be considered to have been totally disabled
- After the qualifying period is satisfied, if an individual returns to work on a full-time basis following a period of total disability for which benefits were payable and, within six months, again becomes totally disabled due to the same or related cause, the individual will be considered to have been continuously disabled
Benefit maximums affect the cost of the plan. There are two types of maximums that apply to an LTD benefit: a non-evidence maximum and an overall maximum. The non-evidence maximum is the amount of insurance that the insurance carrier will provide without requiring the employee to submit medical evidence of good health at the time of enrollment. If the employee would be entitled to a amount higher than the non-evidence maximum (because of earnings or the benefit schedule), then medical evidence would need to be submitted to qualify for the higher amount. The medical evidence is reviewed by the medical underwriting staff at the insurance company to determine the employee’s health and what level of risk the employee represents to the insurance company. The overall maximum is the maximum insurance amount that the insurance company is willing to insure. The benefit formula usually includes a rounding element to the next highest $100.
Direct and Indirect Offsets
Other sources of income payable to the disabled employee are referred to as offsets and are used to reduce benefits payable under the LTD benefits plan. These are direct and indirect and some characteristics of each are outlined below:
- Cover benefits payable under government-sponsored benefits programs including Canada Pension Plan (CPP)/Quebec Pension Plan (QPP), employee disability pension benefits and Worker’s Compensation benefits
- In some cases benefits payable under an auto insurance plan are included as direct offsets
- In these cases benefits payable under an LTD plan become second payer – the employee has to apply for CPP/QPP benefits as well as Worker’s Compensation if the disability is a result of a work accident
- Any amount received by the employee by government sources is then used to reduce benefits payable under the LTD plan
- Benefits payable under an association or other group benefits program
- Any income under any job or business for profit excluding severance or vacation pay except under an approved rehabilitation program
- CPP/QPP disability pension benefits payable to the employee by his dependants
- Disability benefits payable under an automobile insurance plan
- Any retirement benefits related to any employment
All Source Maximum
The all source maximum is included in an LTD benefits plan to account for income from all sources. The purpose of the all source maximum is to prevent situations where an employee’s total income while disabled comes to close to his pre-disability income, eliminating the financial incentive to return to work. Under the all source maximum provision, income from all sources (benefit payable, direct offsets, indirect offsets) is added to determine the maximum benefit payout. The all source maximum is based either on gross earnings or net earnings (depending on the taxability of the benefit) and will limit replacement income up to 80% to 85% of pre-disability income.
Third Party Subrogation of Claims
A disabled employee may file a claim against a third party for causing them to become totally disabled, to compensate for loss of earnings. In this case, if the employee is awarded compensation, they must return any benefits received under the STD or LTD benefits plan through their employer, up to the amount paid out to them by the insurance company.
Cost of Living Adjustment (COLA)
Disability benefits are designed to provide disabled employees with a percentage of pre-disability earnings to enable them to sustain a reasonable standard of living while disabled. For long disabilities (usually past two years), inflationary impacts can diminish the value of the benefit being received by the disabled employee. In order to protect from the erosion of the benefit, group benefits contracts include a cost of living adjustment (COLA), which provides indexing of the disability payment on adjustments in the consumer price index (CPI). The indexing is usually stated to be the change in the CPI but cannot exceed a limit such as 3% or 5%.
Termination of Benefits
LTD benefits cease on the earliest of the date the employee:
- attains age 65
- fails to submit proof of ongoing disability
- refuses or fails to comply with third part subrogation provision
- fails to report for a medical examination required by the insurance company
- ceases to receive professional treatment for the disability being treated
- participates in an occupation for pay or profit other than an approved rehabilitation program
- refuses to participate in an approved rehabilitation program
- is confined in prison or a similar institution
Continuation of Benefits
Disability benefits continue even if the group insurance contract is terminated by the employer. Once an employee is on STD or LTD, the insurance company is obligated to maintain payment of benefits provided the disabled employee continues to satisfy the terms of eligibility outlined under the definition of disability in the group insurance contract. The only situation where the insurance company is not required to continue benefits is if the group insurance contract was on an administrative service only (ASO) basis.
A conversion option is offered by a few insurance companies that allows disabled employees to convert all or a portion of their terminated disability benefit. In order to convert, the employee must:
- provide proof of income from their new employment or business venture
- have actively been working for the employer at the time of the termination of coverage and insured under the LTD benefits plan of the employer
Waiver of Premium
LTD plans include a waiver of premium feature – when the disabled employee is approved for the LTD benefits, the premium for the LTD benefit is waived while the employee is receiving LTD benefits.
Some LTD benefits plans contain a standard provision for the exclusion or restriction of pre-existing conditions. This provision is designed to protect these plans from a negative cost impact form the high claims that could result when an employee with a pre-existing condition joins the employee benefit plan. They typical pre-existing condition limitation is:
- benefits are not payable for a total disability which commences during the first 12 months of an employee’s coverage, if the disability results from any sickness or injury for which the employee was treated or attended by a physician, or for which prescribed drugs were taken within 90 days prior to the effective date of the employee’s insurance
Standard Exclusions and Limitations
The purpose of a disability benefit plan is to provide active employees with financial protection if they become unable to work due to disability. Most plans stipulate exclusions under both STD and LTD coverage, which specify that benefits will not be paid:
- for any period during which the employee is not under the care of a physician
- if the employee engages in any occupation for pay or profit, except as approved by the insurer under the partial disability or rehabilitation provision
- for the period an employee is entitled to maternity or parental leave allowed by law or agreed to with the employer
- if the employee refuses or fails to participate in an approved partial disability or rehabilitation program as required by the insurer
- if the employee is outside of the country permanently or temporarily and such absence is not approved by the insurer
- for any period during which the employee is confined in a penal institution or house of corrections