One in three people will be disabled for 90 days or more at least once before they reach age 65 and there’s a 38% chance the disability will last five years or longer. These probabilities make a well-designed long term disability benefit one of the most important elements in an employee benefits program.
This benefit is structured to replace 60% – 85% of your pre-disability income and can save you from going broke or losing your home if you’re unable to work for an extended period of time. It can also be structured so that the benefit payments when you receive them are tax free.
However, your insurer will want to make sure that there’s an incentive for you to get back to work and earn your full salary as soon as you can. This is where the “all source maximum” comes into play.
The insurer will limit the amount of your monthly disability payment so that the amount you receive from the plan (plus other sources of income replacement as specified in your contract) doesn’t exceed 80% – 85% of your pre-disability net income.
A simple example might help. If you earn a gross amount of $10,000 per month prior to becoming disabled and you have a disability plan that covers 66.7% of your earnings, you may think you have $6,667 of monthly coverage. You may also be paying for this full amount of coverage.
However, if you were to be disabled, your coverage amount would be calculated as follows:
Your $10,000 gross monthly income would result in a net monthly income of $7,345 in BC. If an 85% all source maximum is applied, the actual limit to your coverage would be about $6,244 per month ($7,345 x 85%). Due to our progressive taxation system, the higher the income, the greater the disparity is between the all source maximum and the scheduled benefit that is billed by the insurer.
The existence of the all source maximum means that careful attention must be paid to the design of non-taxable disability plans to ensure that employees, especially higher income earners, aren’t paying for coverage that they’re not actually eligible to receive due to the all source maximum.
For help in understanding this and other factors that go in to the design of an effective long term disability plan, speak to a qualified employee benefits consultant.
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