An extended illness or injury can create a significant financial hardship. Although employees will often express a greater demand for more visible benefits, a Long-term Disability benefit is far more important in protecting the financial well-being of employees. Very few employees will ever be forced to sell their homes because they need eyeglasses or dental work. However, a loss of income can have much more serious repercussions.

 

The main design features of a Long-Term Disability plan are described below;

 

Elimination Period

 

The elimination or waiting period is the period of time that the claimant must be disabled before receiving benefits. The most common elimination period is 17 weeks so that the LTD benefit integrates with the Employment Insurance (EI) plan. However, the elimination period may be as short as 3 months and as long as one year. The length of the elimination period has a direct impact on the LTD premium as a longer elimination period will result in fewer claims. For plans that include a Short Term Disability benefit, the Long Term Disability plan is designed so that the elimination period ends and benefits begin as soon as Short Term Disability benefits cease.

 

Benefit Schedule

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The benefit schedule is generally based on a percentage of the employee's pre-disability gross earnings. When determining an appropriate benefit schedule, the tax status of the LTD benefit must be considered. Unless the plan member is paying the entire LTD premium, the benefit will be taxable when received.

 

Based on the all source maximum definition, the LTD benefit payable will include all direct offsets (WCB benefits and CPP/QPP disability benefits) and indirect offsets (automobile insurance plan benefits, group or association insurance plans benefits, retirement or pension plan benefits, etc.). Therefore, when calculating the benefit a disabled employee is eligible for, income from the following sources will be included under the all source definition: Workplace Safety and Insurance Board benefits, Canada Pension Plan disability and retirement benefits, automobile insurance plan benefits, group or association insurance plans benefits, retirement or pension plan benefits, earnings or payments from any employer, self-employment income, and earnings from any government plan excluding Employment Insurance benefits.

 

In the case of non-taxable LTD plans, it is often useful to use a graded benefit schedule to avoid paying for a disability benefit that is in excess of the maximum benefit that can be received (as a result of the 85% all-source maximum). For example, a common schedule would be 66.7% of the first $2,500 of gross monthly insurable earnings and 50% for all earnings in excess of $2,500. Otherwise, employees may be paying for an LTD benefit beyond that which they are eligible to receive.

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Benefit Maximum

 

There are two types of maximums that apply to an LTD benefit: a non-evidence maximum and an overall benefit maximum. These maximums are determined by the size of the group, the volume of insurance and the nature of the business.

 

The non-evidence maximum (NEM) is the amount of insurance that the insurer will provide to employees without providing medical evidence of good health. A high non-evidence maximum is therefore an important feature of the LTD plan as it guarantees employees a minimum level of coverage (subject to eligibility based on income). For employees who are eligible for coverage in excess of the non-evidence maximum, medical evidence must be provided to the insurer. The insurer will generally grant the excess coverage only to those individuals who are determined to represent a normal level of risk.

 

The overall maximum is the maximum amount of insurance that the insurer will provide under the terms of the contract.

 

Benefit Period

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The benefit period is the maximum amount of time for which LTD benefits are payable. The most common benefit period is to age 65. 

 

Cost of Living Adjustments (COLA)

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Disability benefits are generally based on a fixed percentage of pre-disability earnings. For lengthy disabilities, inflation can substantially diminish the value of the benefit. To reduce the impact of inflation, many companies offer a Cost of Living Adjustment option. COLA provides for indexing of the disability payment based on the Consumer Price Index (CPI). Generally, there is a maximum annual adjustment (e.g. 3-5%).