LTD—Long Term Disability—is the kind of insurance coverage you hope you’ll never need. But more importantly, you don’t want to skimp on it, if you’re employed. Why? Because unless you’re independently wealthy, an injury from a car accident or any other accident, could render you unable to do your job.
How would you support your family? How would you pay for your medical treatments or prescriptions?
I’ve talked about long term disability benefits in the past, but here’s where I get down to brass tacks to explain it all:
Not All Definitions Are Created Equal
If you have an LTD policy, either through your work or a private policy that you’ve purchased because you’re self-employed, there are a few things you should review to make sure that you have a policy that will cover the way you feel most comfortable.
The definition of disability is the first thing to review. It is not the same on every policy. Contrary to the Accident Benefits definitions that are part of your car insurance policy and are decided by the government, the definition of disability for LTD coverage varies from company to company, and even from policy to policy within the same company. However, it’s a critical piece of information as it is what the insurance company will use to decide if you’re eligible for benefits or not.
LTD Eligibility Tests
Your policy will have one of several ‘tests’ to determine eligibility for coverage:
- “Own Occupation” test — this definition basically states that you are eligible for benefits if you are not able to return to the exact job you had before your accident or the onset of your disability. A policy with this test and no time limit as to how long it applies for is probably the costliest but think about what you do for a living. If it’s a specialized job where you would end up taking a major pay cut if you ended up having to work in another field, it’s worth considering!
- Percentage test — this definition outlines a specific percentage of your duties that you cannot do to qualify as being disabled. For example, if you cannot do 65% of your prior duties, you would be considered as being disabled.
- “Any Occupation” test — this definition is the most difficult to gain eligibility under. It asks whether you are disabled for ANY job for which you may be reasonably suited, taking into account your work experience, education, training and previous salary.
- Some definitions will have multiple tests, separated by a ‘change of definition’ date. For example, the test in the first 12-24 months of your disability might be ‘own occupation’, but after the two year mark, the test might change to ‘any occupation’.
What Are Some Other Aspects Of LTD Policies You Need To Know?
First off, you likely will have a qualifying period before you are eligible to get benefits. That period can range from 90 to 180 days. Very often, there are other benefits to be exhausted prior to the start of LTD benefits, such as EI Sick Benefits you would get prior to going on LTD.
In terms of coverage, policies vary, providing anywhere from 60 to 85% of your previous salary. You need to consider what you could live on if you were unable to work for years at a time.
Most any insurance company is going to also ask for objective medical evidence in order to determine eligibility. So your family doctor’s word might not be enough. They may base their decision on other examinations, independent tests and other results.
Tax Implications Of Long Term Disability Benefits
Since LTD benefits are meant to offset the income you’re not making at your job, they become your income. The question is: are they taxable under the terms of the policy?
- If the premiums have been paid in whole or in part by your employer, YES.
- If you have paid 100% of the premiums yourself, NO.
That’s an important distinction if you’re considering getting an LTD policy because you are self-employed or your employer doesn’t offer one.
Whether the sums are taxable take on a whole new aspect if your lawyer is negotiating a lump sum payment. This happens in cases where you are denied or cut off of LTD benefits and, with the help of a lawyer, pursue a lump sum payout. In fact, it can be an advantage, tax-wise, to opt for the payout. Here’s how:
Example: Following a very serious car accident, the terms of your policy indicate that your insurance company will be paying you monthly LTD benefits until the age of 65. The company has to report those payments to CRA as 100% income, as the premiums were paid by your employer. Your lawyer indicates that a lump sum payment might have some tax advantages. Here’s how:
When a lump sum payment is issued, a T4A slip is also issued for the portion of the lump sum that was owed / paid, prior to the settlement of the claim. They do NOT have to issue a T4A slip for any future benefits, or portion of the lump sum that is to come after the settlement date. Further, even if you have a large portion of the lump sum that is allocated prior to the settlement date, you can file a T1198 with CRA, which will allow you to spread out the amount over several tax years, so you don’t get the burden of being taxed for the full amount in the year it is awarded.
Complicated? Yes. The wording of the definitions in your LTD policy aren’t always straightforward, any more than the tax implications of payments or a lump sum settlement are, so it’s a good idea to take the time to consult with a lawyer who is well versed in disability law, to ensure that your policy meets your personal needs, now and in the future.