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Long Term Disability Basics

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Disability insurance is a benefit that is generally one of the most important parts of a benefits package. While some companies opt to fund a short term disability or don’t even offer one at all, many more employers do offer a long term disability program funded through a third party administrator such as a disability insurer.

According to Unum, a major provider of disability insurance, 3 out of every 10 workers between the ages of 25 and 65 will experience an accident or illness that keeps them out of work for 3 months or longer, with nearly 60% of these injuries occurring off the job. If an employee is hurt off the job, worker’s compensation will not cover them. When an employee cannot work for an extended period of time, a long term disability plan can help cover a portion of the employee’s salary. Long term disability usually kicks in after a short term disability policy has run out.

Who Pays for Long Term Disability Coverage?

There are a few choices on who can pay for a long term disability plan. Years ago, many companies paid the full amount for long term disability. Now the trend has costs shifting away from this method. Depending on which option is chosen, there may be different costs and tax implications:
  • Employer fully paid plan
  • Employee fully paid plan
  • Shared cost plan

Coverage Terms

Employers can choose how much coverage to elect for their employees. Most plans cover 50-70% of monthly salary. The duration of plan benefits can also extend for awhile. Some plans only pay out 5-10 years worth of disability to anyone qualified, while others will pay out till age 65, based on a rate schedule.

Under plan rules, employees filing for disability can only qualify for coverage under certain terms. The main terms are listed below:

  • Employees need to work for the employer for a certain amount of time before coverage kicks in.
  • Employees need to work full-time, usually 30 hours or more a week.
The following are part of what a long term disability plan benefits package may include:
  • Percentage of monthly salary paid out up to a pre-determined monthly amount (typically between 50% - 70% of monthly salary).
  • starts (typically between 90 and 180 days).
Depending on plan terms, a person on disability may be limited to how much coverage they receive, and will have to choose another career for which they are suited, in education or training. Another option, usually reserved for highly skilled workers or upper management, is a long term disability contract that allows a person with disability to receive benefits for the lifetime of the coverage, without switching professions.

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