I have not seen a long-term disability policy that provides 100% of your pre-disability wages during the period of disability. Most policies provide either 60% or 66-2/3% of your salary as a benefit. A long-term disability will force you to cut back on your expenses just to get by.
To make matters worse, you may not actually receive the percentage of pay from your long-term disability benefits provider you were insured for? Why is this? There are a couple of reasons. First, most policies have offset provisions that allow the disability company to reduce (offset) benefits for any amounts you receive from other sources. For example, Social Security Disability, worker’s compensation payments, early retirement benefits, etc. You will not be entitled to receive more from all sources of income than the percentage insured.
Another potential reason for obtaining less in long-term disability benefits than you would expect comes in the details of many policies. It is this — many long-term disability policies do not factor in commissions, bonuses, supplemental pay, etc. as part of your income. So if half of your income is paid as salary and half is received as commissions, your long-term disability benefits may be paid only for that portion calculated as salary. Using the 50/50 numbers, your long-term disability benefit would then shrink to 30% or 33-1/3% of your actual income.
And just to twist the knife — unless you actually paid for your benefits yourself with after-tax money, you will generally owe income tax on your long-term disability benefits. Doesn’t the tax man always get his share?
Another often overlooked aspect – you will not receive benefits starting on the day you become disabled. There will be a waiting period. The length of this period is policy specific. Under most policies, this “elimination period” ranges from 30 to 180 days. This means that you must be unable to work and without income (or with reduced income – see your policy for specifics) for the entire period in order to receive your long-term disability benefits.
This is a heavy cross to bear. Unfortunately, if you are truly disabled and unable to work, you must bear it. Knowing what it will take financially to get you through this time and how much you will actually take home as a result of your disability will help you prepare your life accordingly. Discover the other 8 things you should know before filing your long-term disability claim.