The lowdown on LTD

Employers' disability payouts may be slashed if you have other income.

Deanne Gage 12 October, 2011 | 6:00PM

Disability is the one dreaded D word that doesn't get a lot of attention. But statistics show that our chances of suffering a disability are greater than that other dreaded D word (death) before age 65. How can we financially protect our families if we survive a serious accident but are left disabled and unable to work?

Enter long-term disability insurance (LTD), which replaces the income you would have earned if you were still working. Generally, LTD policies give you up to 80% of your gross prior income, so there's incentive for the individual to eventually resume work.

Most of us think we're already adequately covered for LTD through our employer. But how many of us have actually examined our policies in detail? We may find that employer coverage isn't sufficient in a lot of cases, notes Janet Freedman, a fee-only financial planner and president of Finance Matters in Toronto.

Freedman knows first-hand. She had an accident 11 years ago, leading to a spinal-cord injury. Her experiences and research on disability issues become the basis of a co-authored book Hit By An Iceberg: Coping With Disability in Mid-Careerwww.hitbyaniceberg.ca). She says many group LTD policies reduce how much they pay you if you are receiving income from other sources.

Say your group policy purports to pay you $1,000 a month. After workers' compensation, private insurance and any other income, you'll be lucky to receive 50% of the original LTD amount. "I've seen [group policies] where it's reduced dollar for dollar for any money coming from another source," Freedman says.

Individual LTD policies can be tailored to the budget and needs. The price depends on factors like your age, current health, how risky your job is, and your lifestyle. Generally, policies pay out until age 65, unless you are willing to pay hefty premiums to keep the coverage going longer.

Freedman recommends supplementing employer coverage with your own LTD policy, especially if you are worried about losing your job or envision yourself becoming self-employed one day. This way, you are able to get coverage based on your current income -- something that's impossible to do when you're already unemployed or have started your business. That's because you have to prove you have an income to protect, she says.

If your employer's LTD plan is less than adequate, you could opt out of your employer plan, if that's allowed, and get your own policy. Freedman says some people, notably those who do seasonal work, arrange to have their LTD policy kick in six months after diagnosis. In the meantime, they'll survive on their savings, and if they qualify, employment insurance. Delaying the start date of when you receive LTD payouts also means lower premiums.

What things are important to have in an individual LTD plan? As Freedman says, "you get what you pay for so you have to pick and choose what are the best benefits for you."

For starters, watch out for LTD definitions when setting up your policy. For example, insurance companies classify "occupations" in different ways. A "regular occupation" refers to the job you had prior to disability. In this case, you will be considered disabled if you are unable to perform your job's duties and are not working in another occupation.

Compare that to the "any occupation" clause, which means you are unable to work at any job regardless of your specific training. Freedman says you want to avoid an "any occupation" LTD contract. It's unlikely you won't be able to do any job after suffering a disability (think telemarketing, selling papers on a street corner).

Freedman's own policy had a rider called residual income benefits. "That meant even though I started working again, the insurance company would still pay me until my net income was greater than the disability insurance," she explains. "When I went back to work, they paid me because of the nature of my disability, I could not work the hours I used to."

If you're concerned about the overall costs of premiums, there's a return-of-premium rider, which gives you back a percentage of what you paid if there are no claims. "But you will pay more for that benefit," Freedman points out. "You have to weigh whether that's important or having more features that are part of the policy itself."

LTD is a complex product, so Freedman recommends consulting an accredited insurance advisor who can best ascertain your needs and wants.

About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.