Your LTD Insurance Policy and Your Financial Plan: What High Earners Need to Know About Private Coverage
High earners should be aware of private long-term disability coverage. According to the Social Security Administration, there is a 23 percent chance that a worker, aged 20 in 2024, will become disabled before retirement. That probability is significant, and the higher a person earns the more of their pre-disability earnings they need protected.
A long-term disability insurance policy is not something everyone thinks about before they need it. Yet it can play a vital role in protecting an individual’s pre-disability earnings. While many employers offer long-term disability (LTD) coverage, these group policies don’t always provide enough of a safety net for high earners.
In this article, you will learn why high earners need to consider private LTD coverage, along with the differences between group and individual policies, and more.
Key points of this article include:
- Group LTD policies cap monthly benefits, which can leave high earners far short of the 60% income replacement they expect
- Private LTD policies can supplement group coverage without triggering the offsets that apply to other income sources
- A private policy lets you lock in a true “own occupation” definition of disability — something most employer-sponsored plans don’t offer long term
Why Is a Private Long-Term Disability Insurance Policy Better for High Earners?
Private long-term disability insurance policies are better for high earners because many group policies (i.e., employer-sponsored policies governed by ERISA) cap the benefits one may receive each month.
There is a myriad of professions that yield high incomes, including:
- Psychiatrists
- Surgeons
- Anesthesiologists
- Senior Executives
- Physicians
If they develop a medical condition or suffer a catastrophic injury that prevents them from working, then long-term disability can help protect their income.
Watch CCK Law Partners Leah Small and Maura Black discuss catastrophic injuries and long-term disability benefits:
Group LTD coverage typically covers around 60 percent of a person’s pre-disability earnings. However, these same policies also typically cap benefits at a certain dollar amount—even if this amount is under 60 percent of the worker’s overall salary.
For example, a surgeon makes $300,000 per year. Under the 60 percent coverage, they expect to receive a gross monthly benefit of $15,000. But let’s say that the surgeon’s group policy has a monthly benefit cap of $5,000. This means they would only receive $60,000 per year in LTD benefits, $120,000 short of what they expected to be receiving.
Many high earners don’t know about this hidden gap in coverage. It is easy to overlook. But this is where a private long-term disability can help because this gap isn’t just about the missing dollars; it’s about what percentage of income is actually being replaced.
Instead of the 60 percent coverage a high earner expects, a benefit cap can quietly push real income replacement down to something like 20 percent. For a $300,000 earner, that’s the difference between maintaining a mortgage, tuition payments, and retirement contributions and having to draw down savings just to get by.
Group and private LTD policies can work together to provide these extra monthly benefits. When used together, these two policies can bring you to a combined percentage closer to that 60% you were expecting, or more.
Can You Receive Benefits from Both a Group and a Private LTD Insurance Policy?
Yes, you can receive LTD benefits from both a group and a private LTD insurance policy at the same time. It should be noted that:
- Group LTD policies are coverage you receive through the benefits package at your place of employment, and
- Private LTD policies are coverage you receive directly through an insurance company that you bought yourself.
Now, many group policies include offsets. This means that they will deduct the money (i.e., income) that you receive from other sources. This can include:
- Social Security Disability Insurance Benefits
- Workers’ compensation benefits
- Pension benefits
- Benefits from other group long-term disability policies
However, except in rare circumstances, benefits from private individual LTD policies are not treated as an offset.
What Other Aspects of a Private LTD Policy Are Beneficial for High Earners?
Private long-term disability insurance policies offer a lot of flexibility that group policies do not. Group policies are, more or less, set in stone when you receive them. Typically, you cannot alter them. Private policies, on the other hand, can be altered. You pay the monthly premiums on them and have more say in what provisions they contain.
Here are some aspects of a private LTD policy that can benefit a high-income earner.
No Monthly Benefit Caps
As mentioned, group insurance policies have caps on the monthly benefit amount. This means that once your annual income crosses a certain threshold, the percentage of your income that is protected decreases.
However, a private long-term disability typically doesn’t have a benefit cap, as the benefit is usually a set, flat amount each month. In this case, a high earner can plan ahead for what they think they might need should they become disabled and set the benefit accordingly.
Coverage Flexibility
Private LTD insurance policies are more flexible in their coverage. Policyholders buy these policies on their own. Therefore, they can choose the components that they believe will provide them with the most protection.
These types of policies allow individuals to choose the terms and components of their policy. This can include choosing the elimination period, maximum benefit period, definition of disability, benefit amount, and others.
LTD Insurance Riders
Policyholders can also add insurance riders to their policies for extra protection. What is an insurance rider? An insurance rider is an optional provision that an individual can add to their coverage. They can include a future increase option (where you can increase your benefit amount each year until you reach a certain age), a catastrophic injury rider, and others.
You cannot add a rider when you become disabled. You must add riders when you purchase the long-term disability insurance policy. Thus, it is useful to review each rider that your insurer offers and then decide which (if any) makes sense for your specific situation.
Own Occupation Definitions of Disability
All LTD insurance policies — whether group or private — include a definition of disability. This is the standard claimants must meet to qualify for monthly benefits. There are two:
- Own occupation: This definition asks whether you can perform the duties of the specific occupation you were doing at the time you became disabled. For example, if you are a heart surgeon and can no longer perform surgery (but could still work a sedentary job), then you’d be disabled under an own occupation definition.
- Any occupation: This definition asks whether you can perform the duties of any job whatsoever. Using the heart surgeon example, if they could no longer perform surgery but could work a sedentary position, then you would not be considered disabled under an any occupation definition.
Now, most ERISA-governed group policies that you receive through your employer start with an “own occupation” definition but then change to an “any occupation” definition, which is usually much harder to meet, after a set period — typically 24 months. At that time, your insurer would reevaluate your claim under the new definition, which could lead to you losing your benefits.
However, if you have a private insurance policy, you can make it so that it contains a true own occupation definition of disability for your entire claim duration, ensuring that if you cannot work the job you have, then you may receive benefits.
Watch CCK Law Partners Mason Waring and Leah Small discuss what you need to know about the definition of disability:
Taxes Are Often More Favorable
A private long-term disability insurance policy is one in which you pay the monthly premiums. Your employer typically pays some or all of a group policy’s premiums. If your employer is paying the premiums, then those benefits are taxable.
However, if you’re paying your own insurance premiums with post-tax dollars, then these benefits are typically not taxable. It is important to note that if you are paying with pre-tax dollars, then your private benefits will typically still be taxable. Nonetheless, it is always important to consult with a CPA or tax attorney.
Frequently Asked Questions
What if my insurance company denies my LTD claim as a high earner?
File an appeal with your insurance company to get your benefits. Insurance companies frequently deny valid LTD claims, but receiving a denial is not the end of the road. You have the right to file an administrative appeal. The appeal stage is a critical phase of your LTD claim, and it is often advisable to speak with an attorney who can help you go up against your insurer.
What is a “high limit” disability plan?
A high-limit disability insurance plan is one that is designed specifically for high earners. Depending on the insurer, these plans can sometimes insure into the millions. Moreover, these plans may or may not be capped for a certain amount of time; it is important to read the policy to know for sure. Such policies are useful for top-tier professionals with high earning capacity who want peace of mind should they find themselves disabled and unable to work.
Can I have multiple LTD policies at the same time?
Yes, you may have multiple long-term disability policies at the same time. However, if you have two group policies (i.e., you have two jobs both offering you LTD coverage), then these benefits may offset each other depending on the terms of your policies. You may also choose to have a private policy that can supplement the benefits in the group policies; these are not typically offset.
Learn more about having multiple LTD policies at once. In this video, CCK Law Partners Mason Waring and Leah Small explain what claimants need to know:
Need Help with Your LTD Claim? Call CCK Law Today
Regardless of your profession, obtaining long-term disability benefits can be difficult. Even with a private policy, insurers are known to deny claims. In other words, if an insurance company can find any reason at all to deny a claim, it likely will.
Since 1999, CCK Law has been helping long-term disability claimants pursue these all-important disability benefits. While past results don’t predict future outcomes, having an attorney can help you navigate this often-complex process. If you need help with your LTD claim or appeal, call CCK Law today at (800) 544-9144 for a free case evaluation with a member of our team.
