If you cannot work due to a disability, you may be eligible for disability benefits. These benefits can provide a vital source of income to sustain you while you cannot work.
But how can you calculate these benefits? The answer can empower you to plan for your financial future and ensure you receive the support you need. Always discuss your deserved benefits with an experienced long-term disability lawyer.
Types of Disability Benefits
Before we explore how disability benefits operate, it's important to understand the different types of disability benefits available.
The two main types are:
Short-Term Disability Insurance (STD)
Short-term disability benefits are a type of insurance coverage that provides financial support if you temporarily cannot work due to a disabling condition or injury. Private insurance plans may provide them through an employer’s benefits package.
To qualify for short-term disability benefits, you may need to meet certain requirements, such as having a medical condition or injury that prevents you from performing your job duties, and providing medical documentation to support your claim. The duration of the benefits varies depending on the specific insurance plan or employer policy.
Short-term disability benefits are separate from other types of benefits, such as workers' compensation or Social Security Disability Insurance (SSDI). These benefits specifically address temporary disabilities and are typically limited in duration to provide support during the initial phase of recovery.
Long-Term Disability Insurance (LTD)
LTD is a type of private insurance that provides income replacement if you become disabled and cannot work. Employers often offer these policies as part of a benefits package, but individuals can purchase them independently.
The specific terms of LTD policies can vary significantly. They typically pay a percentage of your pre-disability earnings, which can differ from policy to policy. The definition of disability, the length of the elimination period (the waiting period before benefits start), and the duration of benefits can also vary.
When you claim LTD benefits, the insurance company will review your medical records and may require you to undergo an independent medical examination. They'll also examine your job duties and determine whether you can perform them with your disability.
Calculating Short-Term Disability Benefits
The amount of your short-term disability benefits depends on your income before becoming disabled. This includes your salary, commissions, and bonuses. You must provide accurate documentation of your income to ensure accurate benefit calculations.
In addition to your income, the duration of your disability may also affect the amount of your benefits. Most short-term disability plans have a maximum benefit period, typically ranging from three to six months. Depending on the specific plan, your benefits may decrease or end after this maximum period.
Calculating short-term disability benefits is just one part of the equation—as even proving you deserve benefits can be an uphill battle. Having the right disability attorney can make all the difference in securing the STD benefits you deserve.
Calculating Long-Term Disability Benefits
If you have a long-term disability insurance policy, the benefit amount will depend on the terms of your specific policy. Because these benefits must support you for the long haul, you need a skilled disability lawyer to ensure you receive the proper amount.
Typically, LTD policies pay a percentage of your pre-disability earnings, often 50 to 70 percent. The insurance company will first determine your pre-disability earnings to calculate your benefit. This is usually your average monthly income before taxes, but the exact definition can vary by policy. It may include bonuses, commissions, and other types of compensation.
Next, they'll apply the benefit percentage from your policy to your pre-disability earnings. For example, if your policy pays 60 percent of your pre-disability earnings and you earned $5,000 per month before your disability, you will receive $3,000 per month in benefits.
Other factors can affect your LTD benefit amount:
Benefit Cap
Most LTD policies have a maximum monthly benefit amount, often called a benefit cap or maximum monthly benefit. This is the highest amount the policy will pay each month, regardless of your pre-disability earnings.
For example, say your policy has a monthly benefit cap of $5,000 and pays 60 percent of your pre-disability earnings. If you earn $10,000 per month before your disability, 60 percent will equal $6,000. However, the benefit cap will limit your monthly benefit to $5,000.
Benefit caps can vary significantly from policy to policy. Some may be as low as a few thousand dollars monthly, while others may be $10,000 or more. It's important to understand the benefit cap in your policy, as it can substantially impact your disability income.
When shopping for an LTD policy, consider your income and lifestyle needs. If the benefit cap is too low, you may not have enough income to cover your expenses if you become disabled. On the other hand, policies with higher benefit caps typically come with higher premiums.
Other Income
Other sources of disability income can also impact your LTD benefit. Many policies include an offset or integration provision, meaning other disability income sources will reduce your LTD benefit.
Common sources of other disability income that may offset your LTD benefit include:
- Social Security Disability Insurance: If you qualify for SSDI benefits, your LTD benefit may decrease by the amount you receive from SSDI.
- Workers' Compensation: If your disability is work-related and you receive workers' compensation benefits, these amounts may reduce your LTD benefit.
- State Disability Benefits: Some states have their disability programs. If you receive benefits from a state program, Your LTD benefit might decrease.
- Pension or Retirement Benefits: If you receive disability pension or retirement benefits, these amounts may offset your LTD benefit.
The reasoning behind these offsets is that the insurance company wants to ensure that your total disability income doesn't exceed a certain percentage of your pre-disability earnings, often 60 to 80 percent. They don't want you to over-insure.
Taxes
Taxes are another important consideration when it comes to LTD benefits. The tax treatment of your benefits can substantially impact your net disability income.
Generally, if you paid the premiums for your LTD policy with after-tax dollars (this means your paycheck did not deduct the premiums before taxes), your LTD benefits will be tax-free. This is because you've already paid taxes on the money used to pay the premiums.
However, if your employer paid the premiums for your LTD policy or if you paid the premiums with pre-tax dollars (this means your paycheck applied the premiums before taxes), your LTD benefits will likely be taxable. This is because you haven't paid taxes on the money used to pay the premiums.
The tax treatment of your benefits can make a significant difference in your net disability income. For example, if your LTD benefit is $3,000 per month, it's taxable, and you're in the 22 percent federal income tax bracket, your net benefit after taxes will equal $2,340. But if your benefit is tax-free, you'd keep the full $3,000.
If your benefits are likely taxable, you may need to adjust your financial plans accordingly. A financial advisor or tax professional can explain the tax treatment of your benefits and plan for any tax liabilities you may have.
The Importance of Accurate Calculations
Accurately calculating your disability benefit is essential for several reasons:
Financial Planning
Understanding how your disability benefits operate is crucial for financial planning purposes. When you cannot work due to a disability, your income can change dramatically. Knowing how much you can expect to receive in disability benefits can empower you to create a realistic budget and make informed financial decisions.
For example, suppose you earned $5,000 monthly before disability, and your LTD policy pays 60 percent of your pre-disability earnings. In that case, you can expect a monthly benefit of $3,000 (before any offsets or taxes).
With this information, you can adjust your budget accordingly. You might need to cut back on discretionary spending, find ways to reduce your fixed expenses, or tap into savings to make ends meet.
On the other hand, if you overestimate your disability benefit, you might make financial commitments that you can't sustain when your actual benefit is lower than expected. This can lead to financial stress and hardship.
Understanding your disability benefits also helps you plan for the future. If you know how long your benefits will last (many LTD policies pay benefits until retirement age if you remain disabled), you can make long-term financial plans. This might include saving for retirement, paying debt, or investing in your children's education.
Without a clear understanding of your disability income, making these kinds of long-term plans is difficult. You might assume you have more (or less) income than you do, which can lead to poor financial decisions.
Appealing Denials
Another important reason to understand the disability benefit calculation process is for appealing denials. If the insurer rejects your claim for disability benefits or you receive a lower benefit amount than you had thought, understanding how the benefit calculation works can enable you to identify errors and construct a case for an appeal.
For example, your LTD benefit is much lower than you expected. Understanding how the benefit works might make you realize that the insurance company misused the wrong figure for your pre-disability earnings.
Maybe they didn't include your bonuses or commissions, which should have been part of the calculation. With this knowledge, you can appeal the decision and provide evidence of your correct pre-disability earnings.
Similarly, if the insurance company rejects your claim altogether, understanding the definition of disability in your policy and how the insurance company determines disability can empower you to build a case for appeal.
You might realize that the insurance company didn't consider all of your medical evidence or applied the wrong definition of disability.
Negotiating Settlements
You might sometimes receive an offer for a lump-sum settlement of your disability benefits. This is essentially a buyout - the insurance company agrees to pay you a lump sum now in exchange for releasing them from the obligation to pay ongoing monthly benefits.
Deciding whether to accept a settlement offer is a big decision. On one hand, a lump sum gives you immediate access to a large amount of money, which you can use to pay off debt, invest, or cover large expenses. On the other hand, you're giving up the right to ongoing monthly benefits, which can be valuable if your disability lasts a long time.
To make an informed decision, you must understand the full value of your disability benefits. This means calculating not just your monthly benefit amount but also how long you expect to receive benefits (this depends on your age, the terms of your policy, and your prognosis for recovery).
For example, you're 40 years old, and your LTD policy pays $3,000 monthly until age 65. If you remain disabled, that's 25 years of benefits or $900,000. If the insurance company offers you a $300,000 settlement, that might seem like a lot of money—but it's only a third of the total value of your benefits.
Of course, there are other factors to consider. The lump sum is guaranteed, while the ongoing benefits are contingent on you remaining disabled. The lump sum might also be taxed differently than the monthly benefits.
However, calculating disability benefits can be complicated, and many factors can affect the benefit amount.
This is where a disability attorney can:
- Explain your eligibility for different benefits
- Gather the necessary documentation to prove your earnings and disability
- Calculate your expected benefit amount
- Appeal denied claims or negotiate settlements
Choosing the Right Disability Attorney
If you're considering hiring a disability attorney, choosing one with the right experience and qualifications is important.
Look for an attorney who:
- Has experience with both STD and LTD claims
- Is familiar with the specific rules and procedures in your state
- Has a track record of success in handling disability claims
- Offers a free initial consultation to review your case
If you're struggling to understand your disability benefits or facing challenges in receiving them, don't hesitate to seek assistance. Contact an experienced ERISA disability attorneys today for your free consultation.
J. Price McNamara
Attorney
Losing my own brother, then my father and sister after long, disabling illnesses just a few months apart drove a career change for me. Before that experience, I never truly understood the place you’re in. I never understood the dramatic impact that receiving (or not receiving) the disability and life insurance benefits you paid for and counted on can have on your life especially when you need to focus on family and healing. What I experienced with my own family now drives the way I view my clients and my work, and I will never forget it!
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