An employer offers long-term disability coverage of 60% for both accident and illness. There is a `180 day elimination period.

The employer defines disability "as any occupationn" They also require the individual to pay 100% of the premium.

Is this normal? and to me it seems like their definition of disability means that he must be incapable of working any job, with that said would 60% be a low replacement rate?

This is for a class, I'm unfamiliar with Insurance

  • 1
    Many employers cover disability for the first 180 days (the elimination period) as an employee benefit (i.e. cost of doing business). Beyond that, they typically offer long-term disability coverage at group rates (i.e. usually cheaper than the employee can get on the open market). Apr 3 '15 at 22:15

LTD is a bit funny, because the way you pay the premium (and who pays) alters whether you owe taxes on them or not.

If the employer pays the premiums, and you don't, then you are taxed on the LTD dispersal when dispersed, at your normal tax rate (or whatever is appropriate for the particular time). So if you take them as a benefit (so you pay no tax related to the premiums), you owe normal taxes, probably 15-20% of the total.

However, if you pay the premiums and not the employer, and thus pay taxes on the premium, it's like insurance you take on yourself, which is not taxable - you get the entirety tax-free.

There is a third option, which is what I've always had (usually as my only option, though my most recent employer offered a choice). Your employer can pay them "for" you, but you pay taxes on the premiums. Then it's like you're paying them yourself, you're just getting a tiny raise and agreeing to pay LTD with it. That makes your LTD benefit tax-free if you ever have to use it. You'll see it as a special line on your W-2.

I think you'll find option 3 is by far the most common option out there; it's the only one I've ever seen as a default (though like I said I do have the option if I want to of not paying taxes and making it option 1). But employers are certainly free to not pay that extra fringe benefit, as it is a benefit (though I suspect they can't make it mandatory).

That's part of why 60% is a common percentage, by the way. If you think about it, for many people their total income after taxes is around 60-70% of their total salary. So having 60% tax-free is basically like having the normal salary after taxes.

  • The other part of your question - about 'total disability' - is a very different question and should be asked separately.
    – Joe
    Apr 3 '15 at 22:04

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