Long-term disability insurance (LTD) policies replace a percentage of the income an individual was earning before a disability forced them to leave the workforce. The percentage varies by policy, with higher percentages usually corresponding to higher premiums, and more affordable policies generally replacing less of an individual’s lost income. Budgeting with long-term disability income presents significant challenges because the benefit payments always represent a drop in income compared to pre-disability earnings. The options for financial management that long-term disability recipients can leverage are also restricted compared to those enjoyed by many of their peers.
Most LTD policies contain “offset” clauses allowing them to reduce benefit payments in proportion to the income an individual receives from other sources, so financial management on LTD benefits is usually a matter of saving and investing wisely, rather than seeking ways to increase income. What counts as income and the amounts you are required to report to your long-term disability insurance company will depend on the terms of your policy, so as you consider your options for managing money effectively while on LTD, you may want to reach out to an attorney who works in disability law to get help reviewing the legalities of your position.
How Long Will an Employer Keep You on Long-Term Disability?
The Family and Medical Leave Act (FMLA) requires employers nationwide to keep the positions of qualifying employees who take leave for their own or their family members’ medical conditions for up to 12 weeks per year. This 12-week timeframe closely corresponds to the benefit period of many short-term disability income insurance (STD) plans. FMLA leave is unpaid, so many employees who take protected leave under the FMLA to deal with their own health issues also apply for STD benefits to help make up for the loss of income while they are out of work.
These factors together can mean that employers often keep employees receiving short-term disability insurance on their rosters, even though STD itself only protects the employee’s income, not his or her position with the company. Most long-term disability policies, on the other hand, have an elimination period long enough that they do not begin paying until after both STD and FMLA have run their course. As a result, with LTD the lack of job protection tends to become much more obvious.
The duration of benefits themselves is another issue. LTD plans typically do not begin paying until after short-term disability benefits have ended, and in some cases there may be a gap in coverage between STD vs. LTD. Long-term disability elimination periods of three to six months are common. Once benefit payments do begin, the duration of long-term disability benefits will depend on the terms of the policy. Some LTD plans may provide benefits for five or 10 years, while policies with more generous terms may pay out benefits until the policyholder reaches retirement age. Many long-term disability policies have terms limiting the benefit periods for specific conditions, so be sure to review your policy documents thoroughly.
Can You Make Money While on Long-Term Disability?
Some of the most common questions about financial management that long-term disability recipients have involved the options they may have for supplementing their LTD benefits with income from part-time or occasional work. Typically the hope is that they may have enough “good” days of reduced symptoms or lowered activity restrictions to enable themselves to improve their financial situation somewhat, even if their working capacity is far below what would be needed to achieve full financial self-sufficiency.
The answers to these questions about enhancing financial management on LTD benefits with limited work activity can be surprisingly complicated. Ultimately, as with many other aspects of budgeting with long-term disability income, much will depend on the terms of an individual’s specific policy. However, there are a few factors that frequently play a role in structuring what the “rules” for working while on long-term disability may look like in a given situation.
Own vs. Any Occupation LTD
While not an absolute rule, it is often the case that own-occupation disability policies will have fewer restrictions on the amount and type of work an individual can do without risking his or her benefits, compared to the limits individuals budgeting with long-term disability income may face on any-occupation policies. For those who may not have reviewed the terminology recently, the key differences between these two types of long-term disability policies are as follows:
- Any occupation: Plans that provide benefits only if the policyholder is no longer able to work in any job role are the least protective type. They are also the most common, especially among employer-sponsored group LTD plans. Because the ability to work in any field is disqualifying, the limitations on working while receiving disability under any occupation LTD policies tend to be focused on amount, rather than type, of work activity.
- Own occupation: Policies that provide benefits when an individual is unable to continue or resume work in his or her chosen field are the most generous in terms of qualifying for benefits. However, they can vary significantly in how they define an individual’s “own” occupation. Additionally, even if an individual is unable to return to his or her former career path, many own occupation policies will terminate benefit payments if the policyholder’s income from an alternative occupation exceeds a percentage of her or his pre-disability income specified in the policy terms.
Although the specific definition of disability and the criteria for qualifying conditions will vary from policy to policy, eligibility requirements under any occupation policies tend to be closer to those used by the Social Security Administration (SSA) in determining whether an individual qualifies for Social Security Disability Insurance (SSDI) benefits than the corresponding requirements for own occupation LTD.
Financial Management on LTD: SSDI Offsets
Most long-term disability policies of all types require individuals who file benefit claims to also apply for SSDI, but the way policy terms are structured means that individuals who are approved for LTD benefits under any-occupation policies may be more likely than their own-occupation peers to qualify for SSDI. The primary reason for requiring LTD benefit claimants to file SSDI applications is to trigger the SSDI offset clauses allowing long-term disability companies to reduce benefit payments by an amount equal to a policyholder’s SSDI benefit, so generally speaking individuals concerned about managing money effectively while on LTD should not expect SSDI approval to contribute significantly to their monthly incomes.
What Is the Limit of Money You Can Make While on Disability?
For many people, one of the most frustrating aspects of financial management on LTD benefits is the way that work limits are measured. The experience of developing a disability mid-career tends to center on the loss of mobility and dexterity necessary to carry out one’s core tasks, or on decreases in concentration or stamina that make it difficult to function in the workplace. Determination of an individual’s eligibility for long-term disability benefits generally relies on review of medical evidence documenting these same limitations and their disruption of the person’s ability to work. The limits most long-term disability insurance policies impose on the work an individual does while receiving benefits, however, tend to be based on the amount of income earned.
These amount limitations are policy-specific, but for the purposes of their financial management, long-term disability recipients should consider that most policies include provisions requiring anyone receiving benefits to notify the insurance company if they begin receiving income from a source other than their LTD benefit payments. These provisions usually apply to both work and non-work sources, such as SSDI or workers’ compensation. For work-related income, however, there is typically an additional provision that will trigger a termination of benefits if the individual’s earnings exceed a percentage of their pre-disability income specified in the terms of the insurance policy. Often that percentage is calibrated relative to the amount of the monthly benefit payments, which themselves are calculated as a percentage of the pre-disability income. To put it another way: LTD benefit payments cover a percentage of the income an individual was earning prior to leaving work for disability. The amount the same person can earn while receiving disability benefits is often also a percentage of pre-disability income, but in many cases it may be a lower percentage than that calculated for the benefit payments.
How To Prepare Financially for Disability?
One of the most important steps most people can take to prepare themselves for the challenges of financial management on LTD benefits is to select an appropriate long-term disability plan. The terms of each individual policy play the primary role in determining eligibility criteria, qualifying vs. excluded conditions, percentage of income replaced, duration of benefits, and more. Other strategies individuals can often put in place in advance include dedicated savings and investment accounts, emergency funds, and even some types of life insurance policies that offer cash value, although many will apply a penalty fee. Building a strong credit history may also serve you in good stead.
How To Save Money When You’re on Disability?
If you are already budgeting with long-term disability income, then some of your options may depend on whether you accepted a lump-sum settlement vs. getting approved for monthly LTD benefit payments. Overall, however, the major difference between financial management on LTD benefits and any other financial planning strategy is that virtually all techniques for managing money effectively while on LTD rely on making the most of the money already available, rather than finding ways to increase income. Even if you are able to do some work on a part-time basis, your LTD benefits will likely be reduced proportionately. Given the limited options for financial management long-term disability recipients enjoy compared to their peers on non-fixed incomes, and the potentially devastating personal consequences of losing access to benefits, you may wish to consider reviewing the terms of your policy with a disability law attorney. Even if you have no legal quarrel with your long-term disability insurance company, an attorney may often be in a position to help you understand the activities that would likely risk termination of benefits vs. those that might help you to supplement the resources available to you in budgeting with long-term disability income.
Planning for Long-Term Financial Stability on LTD Benefits
Managing your finances while receiving long-term disability benefits requires a balance between meeting immediate needs and safeguarding future stability. Because income opportunities are often restricted by policy terms and offsets, success often comes from careful budgeting, strategic use of savings and investments, and a clear understanding of what activities could jeopardize your benefits. By reviewing your policy in detail, tracking expenses closely, and seeking professional legal or financial guidance, you can make informed decisions that protect your LTD benefits while maximizing the resources available to you.
