Long term disability insurance (LTD) is a type of insurance policy designed to provide financial support to individuals who are unable to work for an extended period due to an illness, or injury. LTD policies offer a safety net by replacing a portion of the policyholder’s income during the time they are medically unable to perform their job duties, ensuring financial stability and helping to cover living expenses and medical costs.
Key features of long term disability insurance include:
Benefit period
LTD policies specify the duration for which benefits are paid, which can range from a few years to until the policyholder reaches retirement age, depending on the policy terms.
Waiting period
Also known as the elimination period, this is the time between the onset of disability and when benefit payments begin. Waiting periods can vary, commonly ranging from 90 to 180 days. Group plans often set the waiting period to end when short-term disability or EI sickness benefits run out.
Coverage amount
LTD benefits typically replace 50% to 70% of the policyholder’s pre-disability income. The specific percentage is determined by the policy terms and the premium paid.
Definition of disability
Policies define disability in various ways, with “own occupation” policies covering individuals who are unable to perform the duties of their specific job, and “any occupation” policies requiring that the individual be unable to perform the duties of any job for which they are qualified by education, training, or experience.
Premiums
The cost of LTD insurance can vary based on factors such as the policyholder’s age, occupation, income level, and the chosen benefit and waiting periods.
Tax implications
The taxability of LTD benefits depends on who pays the premiums. Benefits from an individual policy that the policyholder pays for are generally tax-free. Under an employer’s group plan, the benefits are taxable to the employee if the employer pays any part of the premiums, reduced by the premiums the employee has paid; if employees pay all of the premiums, the benefits are not taxable.