Long term disability benefits (“LTD”) policies are intended to replace your income when you are unable to work due to symptoms from an illness or injury. How much you receive depends on the LTD policy which your employer has negotiated with the insurer or the contract you purchased privately.

How is my LTD benefit calculated?

Percentage of income:

LTD benefits are often calculated as a percentage of your pre-disability income. Your pre-disability income is defined by your insurance policy. It is important to review the definition – particularly if your income is largely based on commission or bonus. Pre-disability income may be defined as your monthly salary and may specifically exclude bonuses. Alternatively, bonus or commission may form part of your pre-disability income. If bonus or commission income is included in the calculation of your pre-disability income, you will likely need to provide the insurance company with historical information showing a pattern of pre-disability income. The LTD benefit might be based on your average income over several years before you became disabled.

Generally, the policy will set out the benefit calculation in a Schedule of Benefits.  Your benefit may be calculated at a rate of 50 to 75% of your pre-disability monthly income.

Example 1 – Flat Percentage:

Ann’s pre-disability income is $72,000/year or $6,000/month

66.67% of monthly pre-disability earnings

Benefit amount:   $4,000/month

The calculation may also be staged. A staged calculation would be set out in the insurance policy.

Example 2 – Staged Percentage:

James’ pre-disability income is $72,000/year or $6,000/month

60% of the first $3,000 of your monthly pre-disability earnings           $1,800

Plus 50% of the next $2,000 of your monthly pre-disability earnings   $1,000

Plus 40% of the excess           $400

Benefit amount:              $3,200/month

Maximum monthly benefit:

LTD benefits often have a maximum amount which can be paid in the case of disability, regardless of your income. For instance, the policy might provide a benefit calculation as well as a maximum monthly benefit of $3,000. The contract language limits the benefit to the maximum benefit amount despite the benefit calculation result based on the insured’s actual income.

Example 3 – Maximum benefit amount:

Tina’s pre-disability income is $72,000/year or $6,000/month

66.67% of monthly pre-disability earnings

Benefit amount based on calculation in policy:  $4,000/month

But … Tina’s monthly disability cannot exceed the maximum benefit amount set out in the policy and her benefit is $3,000/month.

Nonevidence maximum limit:

Group insurance LTD policies sometimes provide a non-evidence maximum. When an employee enrols in the benefit plan, their LTD benefit amount will be calculated in accordance with the calculation set out in the policy. However, the employee’s maximum benefit is limited to a maximum benefit amount unless the employee applies for additional LTD benefits and provides medical evidence to the insurer. If the insurer accepts this evidence, the employee will be entitled to benefits based on their actual pre-disability earnings above and beyond the non-evidence maximum. There may still be a monthly maximum amount provided in the policy but the LTD benefits will be for an amount which exceeds the non-evidence maximum.

Example 4 – Non-evidence maximum

Fred’s pre-disability income is $72,000/year or $6,000/month

66.67% of monthly pre-disability earnings

Benefit amount based on calculation in policy:    $4,000/month

Non-evidence maximum in the policy:                    $2,500/month

Fred’s employer will provide him with a form to apply for additional insurance. If he fails to submit the form in time to the insurer, he will only be entitled to $2,500/month on disability. If the insurer does not approve his additional disability coverage based on his health history, Fred will only be entitled to $2,500/month on becoming disabled. If Fred is approved by the insurer for additional coverage, he will receive $4,000 per month if he is approved for disability.

Cost of Living Adjustments (“COLA”)/Inflation Protection

Recall that the monthly long term disability benefit is based on the disabled person’s pre-disability income at the time of disability. A disability claim could be paid for many years. Unless there is an inflation protection/COLA adjustment provided in the policy, a person with an LTD benefit of $3,000 in 2024 will be paid $3,000/month in 2044. The disabled person’s standard of living will be significantly decreased if their only source of income is the LTD benefit. One way to obtain some inflation protection while disabled is to apply for CPP disability (“CPP-D”) which is indexed to inflation.

If inflation protection is provided in a group insurance policy (the LTD benefits provided through your employer), the provision will be set out in the LTD provision of the policy or at the beginning of the policy in the Schedule of Benefits. There may be a limit provided on the amount of the increase. The provision may set out a calculation which is linked to the Consumer Price Index with a limitation that the benefit can not increase by more than 2%.

If inflation protection is provided in a private or individual policy, it will usually be found in a cost of living protection rider which is an additional benefit attached to the policy.

Income Tax

If you purchased an individual disability policy or if you paid 100% of the premiums for your group LTD coverage, you will not pay income tax on your LTD benefits or report that income on your tax return. However, if your employer paid any portion of the premiums for your LTD benefits, your benefits will be subject to income tax. The insurer will deduct income tax from your benefits, and you will receive a T4A for the income received as a result of LTD benefits you have received in any given year.

Conclusion

While LTD benefits are intended to replace a portion of your income when you become disabled, the contract will set out the details of the benefit you will receive. It is important to check the insurer’s calculation and read the contract.

For advice please text 613-777-0992 or contact us through our website to schedule a meeting with one of our lawyers.  We provide a free consultation, in French or English, to ensure that your rights are protected.   In most cases, we can offer to represent you on a contingency fee basis.  This means that you do not pay legal fees unless you win or achieve a settlement on your case.

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