Long-term disability income insurance (LTD) is designed to replace a portion of the income an individual loses if he or she suffers illness or injury and is no longer able to work as a result. Typically, the benefit payments provided under LTD policies are calculated as a percentage of the policyholder’s pre-disability earnings. This percentage is specified in the terms of the policy, so managing long-term disability wisely will to some extent depend on how much of the person’s previous income LTD benefits replace. Managing long-term disability benefits can also look different for individuals who live alone vs. those in dual-income households, and for those who are disabled due to work-related injuries vs. developing chronic illnesses or progressive conditions. As important as it may be to research LTD financial planning tips, the most effective LTD benefit management strategies will usually be those that respond directly to the specifics of an individual’s personal situation. A conversation with a personal financial planner or an attorney with experience in LTD cases may be useful as you strategize for your financial future.
How Do LTD Benefits Work?
Developing effective LTD benefit management strategies is likely to be easier with a clear grasp of how long-term disability plans work. Unfortunately, most people who find themselves looking for LTD financial planning tips have little to no personal experience of private disability insurance, and the various other forms of financial support available to people with disabilities may not always serve as useful models. These other types of disability assistance are sometimes most useful as potentially familiar points for contrast or comparison.
Managing Long-Term Disability Benefits: Setting Expectations for Group vs. Individual LTD Policies
Private long-term disability insurance policies may be purchased individually, or they may be obtained through a group plan. Most group plans are provided by employers, who typically pay a portion of the insurance premiums, but some professional organizations, including labor unions, also offer group plan enrollment. The premium costs and amounts covered vary, but as a general rule group plans have lower premium costs and also provide less coverage for income replacement, while individual LTD policies generally cost more in premiums but are also likely to cover a greater percentage of the policyholder’s former income. Many people on group plan LTD choose to purchase individual supplemental coverage or policy riders to secure enhanced benefits if they ever need disability insurance.
Managing Long-Term Disability Income Wisely: What Does LTD Cover?
Whether purchased individually or under the auspices of a group plan, private long-term disability income insurance typically works by guaranteeing a certain percentage of the insured person’s pre-disability income. The coverage calculation works in a manner somewhat similar to homeowners’ insurance: If a home is insured for $325,000, then $325,000 is the maximum amount the insurance policy will pay for any claim, but it is not the minimum amount paid for every claim. Instead, when the damage done to a home is less than the home’s insured value, then an insurance adjuster calculates the cost of eligible repairs and the insurance policy pays only the approved amount.
LTD policies are different from homeowners’ insurance calculations in that LTD generally guarantees a percentage of former income, rather than an exact dollar amount. This allows for the actual amount that will be covered to be dynamic under the terms of the policy, so that the maximum payout will automatically be calculated based on the amount the policyholder was earning prior to leaving work due to disability instead of needing an update to policy terms every time the individual gets a raise or a decrease in pay. However, the general principle that the coverage amount is the maximum and not the minimum applies to both homeowners’ insurance and long-term disability.
Effective LTD Benefit Management Strategies: Can You Make Money While on Long-Term Disability?
Many LTD policies use “offset” calculations to subtract the amounts that qualified recipients receive from other sources, such as workers’ compensation benefit payments or Social Security Disability Insurance (SSDI), from the total benefits the LTD provides each month. Just as homeowners’ insurance covers an insured property up to a specific amount, long-term disability income insurance covers a policyholder’s income up to a percentage of the amount the person was earning at the point when they left work for disability. This can be discouraging to many people intent on managing long-term disability income wisely, since it has the effect of placing a “cap” on their potential income.
LTD Financial Planning Tips: Calculating Potential Residual Benefits for Part-Time Work
This cap applies not just to other sources of disability assistance, but to earned income from work. Many long-term disability policies do contain provisions allowing individuals to work part-time or in a reduced capacity while receiving benefits. However, they also tend to apply a logic similar to the offset provisions that reduce benefit payments when a recipient is also approved for SSDI or awarded workers’ compensation.
The scaled-back benefits provided when an individual works during long-term disability are called partial or residual benefits, and while the specifics will depend on the terms of the policy the reductions are typically based on comparing the percentage of pre-disability income an individual is earning through work with the percentage guaranteed by the policy. Assuming a policy that makes its partial benefit adjustments in ranges of 20% pre-disability income, an individual whose LTD insures up to 80% of pre-disability income, who takes a part-time job that pays an amount equivalent to 40% of that former income, is theoretically eligible to receive LTD benefit payments equal to 40% of his or her pre-disability income, if no other offsets or exclusions apply.
What Income Affects Long-Term Disability?
Although the specifics vary by policy, there are a few types of income that insurance companies commonly use in considering whether they may lower an individual’s benefit payments. Because LTD benefits themselves are intended to replace a portion of the income an individual will lose if he or she is no longer able to work, the types of income most long-term disability insurance policies look at in evaluating potential benefit reductions are those that are intended to serve a similar function.
Part-Time Wages and Wage Replacements
Wages earned from part-time work, when an individual is unable to continue in their previous position but still able to work enough, in terms of billable hours or total product, to replace at least a portion of their own former wages, are a prime example. Other types of income that fall into this same general category include SSDI payments and the disability benefits some injured workers receive for workers’ compensation.
LTD Financial Planning Tips: Review Your Other Sources of Income
The same wage-replacement logic that underpins offset provisions and residual benefits also means that income from sources other than earnings from your work activity are often not counted in LTD benefit calculations. Unlike many “means-tested” programs, long-term disability insurance will usually not consider factors such as income earned by another member of your household, or additional resources such as personal savings or retirement accounts. Because developing effective LTD benefit management strategies depends heavily on understanding the factors that affect the amount of the benefit payments you receive, it is important to review the specific provisions of your own long-term disability insurance policy.
Managing Long-Term Disability Benefits: Know Your Options and Use Them
Managing long-term disability income wisely requires understanding the options available to you under the terms of your policy, as well as the limitations that may be imposed on you by your medical condition. Long-term disability policies tend to have similar offset provisions concerning disability benefits from other sources, but they vary more widely in how they handle residual benefits and other considerations. The percentage of your income disability benefits replace will obviously affect effective LTD benefit management strategies in your case, but it is important not to overlook factors such as the tax status of benefit payments and the implications of any supplementary coverage as you prepare for managing long-term disability benefits. A disability attorney or finance professional may be able to give you LTD financial planning tips tailored directly to your personal circumstances.
