Every long-term disability policy has these key provisions. These include:
Definition of disability: This key provision determines when — and if — the policy will pay benefits. Some policies define disability as the inability to perform material and substantial duties of one’s own occupation. Others pay benefits only when the insured cannot work in any occupation for which he/she is reasonably suited by education and experience. Many policies presume an insured is totally disabled when he/she loses sight, speech, hearing or use of limbs.
Elimination period: The insured must be disabled and out of work for a specified elimination period before the policy will begin paying benefits. For most group policies, this ranges between 90 and 365 days.
Benefit amount: The typical group long-term disability policy pays a maximum of 40 to 66 percent of pretax earnings, not including commissions and bonuses. Employees may increase their benefit by buying additional, voluntary coverage. To avoid creating disincentives to returning to work, however, most policies limit total compensation received from all policies to no more than 80 percent of pre-disability levels.
Benefit term: The length of time a policy will pay benefits ranges from one year to retirement age. A typical group policy might pay benefits for five years with the option to buy a longer benefit term for an additional premium.
Partial disability benefits: A “bare-bones” policy might pay benefits only for a total disability. Partial disability benefits encourage a disabled employee to return to part-time employment by replacing some income lost due to reduced hours.
Residual benefits: Residual benefits allow an insured to receive partial benefits based on a loss of income due to loss of capacity or change of job duties due to disability. Like partial disability benefits, residual benefits encourage early return to work.
Cost of living adjustment: A cost of living provision can ensure that inflation doesn’t erode the value of long-term disability insurance benefits. It automatically increases the benefit amount by a specified percentage after each year of disability.