Long-term Disability Insurance - Income Replacement Benefit

Plan Design

Long-term disability claims are normally adjudicated and insured by a third party. The claims adjudicator is responsible for determining whether the claim should be paid and for what duration.

As a disincentive to prolong claims, most benefit schedules are designed to ensure a 15% loss in after-tax earnings. Most plans have an 85% all source maximum which reduces claim payments to ensure that claimants do not receive more than 85% of their after-tax earnings. Many benefit schedules provide coverage that will never be claimed, yet only a few underwriters take this into consideration when calculating the unit rate. Check to see if you are paying for coverage that cannot be claimed.

It is important to define earnings appropriately so as to include all forms of earnings that should be insured while minimizing the frequency of updating the information.

The qualifying period is the duration that the claimant must be totally disabled to qualify for a claim. This can be different from the elimination period when partial or residual disabilities are covered.

The elimination period is the period of time that the claimant must be disabled before receiving benefits. This normally coincides with the benefit period of the short-term disability benefit program.

The benefit period is the period of time that claim payments can continue. Most plans continue benefits until the claimant reaches age 65. It is possible to have a different benefit period for accident and sickness.

The plan design should facilitate early return to work on a part-time or modified duty basis. Ideally, residual or partial disability benefits are covered for the full benefit period. Most plans at least provide a rehabilitation benefit to encourage claimants to return to work.

The definition of total disability often changes from the "inability to perform your own occupation " to the "inability to perform any occupation for which you are or can become qualified for". This gives the claimants a reasonable time to integrate themselves back into their field or get accustomed to the idea of retraining.

A pre-existing condition limitation reduces the risk and affects the cost of the benefit. Claims that are incurred within the first 5 days, 3 months or 12 months are not eligible if the claimant was treated for that condition within the corresponding 90 day, 12 or 24 months.


Employer Paid
Employer contributions toward the cost of disability insurance are non-taxable benefits but the disability claim benefits are taxable income. The employee can offset the taxation of their claim with their contribution toward the premium.

Employee Paid
If the employee pays the full cost of disability insurance then any disability claim benefits are non-taxable income.