What is long-term disability?

Long-term disability is an insurance benefit that pays employees approximately 50 to 70% of their salary when they are unable to work for an extended period of time due to a chronic illness or debilitating injury. This benefit begins when short-term disability ends, usually between 10 and 53 weeks after the initial disabling event. The exact length of long-term disability coverage depends on the specific policy but can last as long as five to 10 years or until the individual reaches 65 years old. Long-term disability policies can be paid for by the employer, the employee or shared between the two.

Excluding pre-existing conditions, which are often not covered by long-term disability policies, some of the conditions that qualify an individual to receive long-term disability coverage include:

• Cancer
• Mental health issues
• Injuries following an accident
• Carpel tunnel syndrome
• Stroke
• Epilepsy

Why is long-term disability important?

Long-term disability insurance is a valuable way to protect the financial health and stability of employees in the event of a disabling event or illness. Some of the additional benefits of long-term disability insurance are that it:

• Allows employees to preserve their retirement savings until they reach 65
• Is tax-free
• Does not impose restrictions on how to spend it

Like offering comprehensive health insurance, generous paid-time-off policies and retirement plans, companies may also consider offering long-term disability insurance as a strategy to increase employee loyalty and reduce employee turnover.

Related: How to Reduce Employee Turnover

Common types of long-term disability insurance

Although exact plans vary between employers, the most common types of long-term disability insurance include:

• Employer-provided plans: This plan generally pays 60 to 70% of an employee’s salary, not including bonuses or commission, and often has a financial cap on the total dollar amount paid or the number of years covered.
• Employee paid plans:In this plan, the employer acts as a facilitator, connecting employees to the insurance company’s plans but not paying for the cost of the plan. In these instances, employee contributions are often deducted monthly from their paycheck, similar to employee contributions to a traditional health care plan. Employees can often customize the terms of these policies through riders, which are provisions that add or amend specific plan coverage.
• Shared cost plans: Both employers and employees contribute to the cost of the coverage plan. One option is for the two parties to split the costs of a given plan, each making monthly contributions to the cost. Another option is for employers to cover the entirety of a basic planwith a lower coverage amount and offer employees the option to pay for a higher coverage plan. Higher coverage could be framed in terms of the annual financial cap or the number of years the policy covers.
• Government-supported plans: Social Security Disability Insurance (SSDI) and Social Security Income (SSI) are two long-term disability benefits offered by the federal government. SSDI is available for individuals who worked and contributed a certain amount of money through income taxes. SSI is available for low-income individuals who have not worked or who did not contribute enough taxable income while working to qualify for SSDI.

Long-term disability plans also differ based on the following criteria:

• Number of years the plan can be redeemed
• The total amount of financial coverage, either as a dollar amount or percentage of the employee’s salary
• Rate of cost for coverage
• Eligible conditions or qualifying events
• Whether or not it includes retirement protection,such as IRA or savings account contributions
• Whether or not it includes a cost-of-living adjustment

Best practices for your business

Here is a list of best practices for businesses that are considering offering, or have decided to offer, long-term disability insurance to employees:

• Consult your state regulations to determine if it is mandatory.
• Review your budget to determine if you can afford it.
• Evaluate the potential benefits in the context of other benefits provided to determine the potential impact on employee retention.
• Research and compare various policy options.
• Include information on your long-term disability coverage in your new employee onboarding process.

Related:Onboarding Best Practices

Long-term disability FAQs

Here are some frequently asked questions about long-term disability:

What is the difference between own-occupation and any-occupation disability insurance?

Own-occupation and any-occupation disability insurance are two types of long term disability coverage. Own-occupation plans provide benefits to individuals whose disability prevents them from performing the duties of their original job, even if they are able to work a different job. This plan also allows those on leave to simultaneously collect disability benefits and income from the alternative occupation.

For example, a teacher who suffers a hearing loss and can no longer teach would qualify for disability benefits, even if they find employment in another field. In this case, their disability coverage would not be decreased because of income earned at the alternative job. Depending on the exact plan type, they may or may not have to have been working as a teacher when the disabling event occurred in order to receive benefits.

Any-occupation plans provide benefits to individuals who are not able to perform the duties of any job as a result of their disabling event. For example, the teacher who suffered hearing loss would not qualify for any-occupation coverage if they are able to perform other jobs inside or outside of the school setting.

What is an elimination period?

An elimination period refers to the time in between when an individual becomes disabled and when they can begin collecting long-term disability coverage. This waiting period is often very similar to the number of times individuals can collect short-term disability. Employees can adjust the length of this period by paying to add an elimination period rider to their coverage plan.

Can you deduct long-term disability premiums on taxes?

Unlike other medical expenses, long-term disability premiums cannot be deducted on personal income taxes.