By Peter Casciano, Esq.
When claimants win long-term disability, LTD insurance carriers will pay a monthly benefit. Typically, the carriers pay a percentage of what that person earned before the disability. The typical percentage range for most disability policies is between 60% and 66.66% of the claimant’s pre-disability income. For example, if the claimant’s pre-disability earnings is $75,000 yearly, and the policy provides for LTD benefits at the 2/3 rate, that claimant will receive $50,000 per year or $4,166.67 monthly.
Once the claimant is approved, especially after an appeal where the claimant has been waiting for months and months to go into pay status, it is easy to overlook this key issue: how did the carrier determine my pre-disability earnings?
How Pre-Disability Earnings Are Calculated
An important question that typically comes up is: over what period of time is the carrier looking? I would say that pre-disability earnings are typically calculated using one of three timeframes. Many LTD policies look at the immediate 12 months preceding the claimant’s date of disability. For example, if your date of disability is March 1, 2018, the carrier will look to see how much the claimant made from March 1, 2017 to February 28, 2018.
The second popular period of time used in LTD policies is to simply look back at the W-2 of the year preceding the year of disability and simply use that number.
Third, some policies will examine how much money the claimant earned over the immediate 12, 24, and 36 months respectively. Then, the carrier will calculate how much they earned per month using each figure, and use the highest monthly amount as the pre-disability earnings. This tends to be the fairest method.
Those in the sales industry are particularly susceptible to reductions by the carrier to the pre-disability earnings calculation. In many LTD policies, bonuses, commissions, and expense checks are excluded from the pre-disability calculation. If the policy calls for such a reduction, the claimants are usually barred from arguing that those amounts should be considered part of the pre-disability earnings calculation.
If your policy contains a clause like the one above, it will be difficult (if not impossible) to force the carrier to include in the LTD calculation pre-disability commissions, for example. However, the carrier is not always correct when it says the policy includes a particular clause. It is critical to verify in the actual policy that the carrier is behaving in the appropriate way.
Pre-disability earnings must be verified, even if the claimant’s pre-disability salary was paid regularly, without bonuses, commissions or special distributions. A common way for carriers to attempt to reduce the value of pre-disability earnings is to exclude from that amount pre-tax contributions made by the claimant to FSA accounts or other employment related benefits. Again, one must look in the policy for the particular clause regarding this issue. Should the policy be silent regarding a specific issue like this, it is likely that those pre-tax contributions should be included in your pre-disability earnings.
This issue becomes further complicated for owners or partial owners of businesses. In many of these cases, it is imperative to consult with an accountant who can verify the work done by the carrier’s accountant in determining what value was used for pre-disability earnings. Monthly profit and loss statements are typically valuable pieces of financial information when determining the pre-disability earnings of the owner of a business.
If you have questions about pre-disability earnings or you suspect that the long-term disability carrier has miscalculated your LTD benefit, please contact me for a free consultation on long-term disability benefits in Maryland.
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