LTD 101: Why owners need to offer it

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Long-term disability is far more important than life insurance as the risk of getting injured or sick and being unable to work is greater than an unexpected death.

Read: The moral argument for life insurance

Unfortunately, employers with 10 or fewer employees typically have less than a 50% participation rate when it comes to implementing long-term disability benefits for their employees.

LTD 101

Long-term disability provides coverage should an employee become totally disabled as the result of an injury or illness and is unable to work. The benefit begins after an employee has been off of work for 119 days.

The monthly disability benefit the employee is eligible for is determined as a percentage of the employee's taxable income. The insurer sets the premium by the demographics of the group and the claims made on the insurer's block of business.

The most common way to determine the monthly benefit is 67% of the employee's taxable income. To get a lower disability premium the employer could elect 50% of the employee's taxable benefit or a flat 2000/month.

Why should employers offer LTD?

There are four reasons why employers should offer long-term disability benefits to their employees:

  1. Employees may not be eligible for coverage due to occupation
  2. Uninsurable due to health issues (a diabetic, heart attack or cancer survivor would never be able to qualify for a private plan due to medical history)
  3. The coverage is too expensive for an employee to purchase through a private plan
  4. Employees typically should the cost keep it a non-taxable benefit. In other words the employer does not need to pay anything.

Roadblocks to offering coverage

Long-term disability premiums are pricy, but one has to keep in mind the losses that can result for an employee who does not have benefits. An employee earning $47,000 is eligible for a monthly benefit of $2500/month. In this scenario imagine the employee is 40 and has coverage until age 65. The potential loss is $360,000 should the employee not return to work.

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