Is Disability Insurance Through Work Enough?
It might be—but don't assume “60% coverage” means 60% of your paycheck is protected.
Seeing “60% long-term disability” in your employee benefits can sound reassuring. But that number alone doesn't necessarily tell you how much of your income is actually protected.
The answer can depend on what income your plan covers, whether there's a monthly benefit maximum, how benefits may be taxed, how the plan defines disability and other important provisions.
So before deciding whether you need additional coverage, let's figure out what you already have.
Start With One Question: 60% of What?
Seeing “60%” in your long-term disability benefits doesn't necessarily mean 60% of everything you earn is protected.
The first thing to find out is what your plan considers covered earnings or predisability earnings.
Depending on the plan, that may include only your base salary—or it may also include some combination of bonuses, commissions or other incentive compensation.
That distinction can make a significant difference, especially if a meaningful portion of your income comes from compensation outside of your base salary.
Don't start with the percentage. Start with the income the percentage is being applied to.
What Can “60% Coverage” Really Look Like?
Sarah's Income
Sarah's Employer LTD
Sarah's Employer LTD
Base salary: $145,000
Annual bonus: $35,000
Total compensation: $180,000
Sarah's Employer LTD
Sarah's Employer LTD
Sarah's Employer LTD
Replaces: 60% of covered earnings
Monthly maximum: $7,500
Premium: Paid by employer
Sarah's LTD Benefit
Sarah's Employer LTD
Sarah's LTD Benefit
Covered earnings: Base salary only
60% of $145,000 = $87,000/year
Monthly benefit = $7,250
Bonus: Not Included
The Real Percentage
Sarah's Employer LTD
Sarah's LTD Benefit
Gross income replaced: 48.3%
Employer-paid Premium: Benefits are generally federally taxable
What Those Numbers Really Mean
Sarah earns a $145,000 base salary plus a $35,000 annual bonus, bringing her total annual compensation to $180,000.
Her employer's long-term disability plan provides a benefit equal to 60% of covered monthly earnings, up to a maximum of $7,500 per month. In Sarah's plan, covered monthly earnings means her base salary only—her $35,000 annual bonus isn't included.
Based on her $145,000 salary, Sarah's calculated disability benefit would be $7,250 per month, or $87,000 per year.
Compared with her $180,000 in total annual compensation, the plan described as providing “60% coverage” is actually replacing approximately 48.3% of her gross income.
But there's another important piece many people overlook: taxes.
Because we're assuming Sarah's employer paid the premium, her disability benefits would generally be subject to federal income tax. That means the income Sarah ultimately receives would be even less than the $7,250 monthly benefit shown above.
This doesn't mean Sarah has bad coverage. It means “60%” didn't tell us the whole story.
The Employer Disability Coverage Audit
8 questions to help you understand what you actually have.
Start with the percentage shown in your plan, such as 50% or 60% of covered earnings. But the percentage alone doesn't tell you how much of your actual income is protected.
You also need to know what income the percentage applies to and whether a monthly maximum limits the benefit.
Look for how your plan defines covered earnings or predisability earnings. Depending on the plan, benefits may be based only on your base salary—or may also include some combination of bonuses, commissions or other incentive compensation.
If a meaningful portion of your income comes from outside your base salary, this can create a significant difference between what you earn and what your plan actually protects.
Many employer disability plans place a maximum on the amount they will pay each month. Once your calculated benefit reaches that limit, earning more income doesn't necessarily result in a larger disability benefit.
For higher earners, the monthly maximum can cause the actual percentage of income being replaced to be much lower than the percentage shown in the plan.
Who pays the premium can affect how your disability benefits are taxed. If your employer pays the premium, benefits are generally subject to federal income tax.
If you pay the entire premium with after-tax dollars, benefits are generally received free from federal income tax.
If the cost is shared or premiums are paid with pre-tax dollars, the tax treatment can be different.
The benefit shown in your plan and the amount you actually have available to spend may not be the same.
The definition of disability determines what must be true for you to qualify for benefits. Some employer plans may initially evaluate whether you can perform the duties of your own occupation, then later apply a broader any occupation definition.
That distinction can become especially important during a longer claim.
How much the plan pays matters. So does what you have to prove to receive it.
Don't assume that “long-term” automatically means benefits will continue until retirement age. Your plan will specify a maximum benefit period, which determines how long benefits may continue for a qualifying disability.
Some plans may also have shorter benefit periods or limitations for certain conditions.
Understanding when benefits could end is just as important as knowing when they begin.
Depending on the plan, benefits from other sources may reduce the amount your employer disability plan pays. These are often referred to as offsets.
For example, Social Security disability benefits may reduce the amount payable by the employer plan rather than simply being added on top of it.
Check your plan to understand which other income benefits, if any, can reduce your LTD payment.
Employer-sponsored disability insurance is generally tied to your employment. If you leave your job, your coverage may end, although some plans may offer portability or conversion options.
That means a job change can also mean a change in your income protection.
Understanding whether your coverage follows you—or stays behind—is an important part of evaluating what you actually have.
Can I Just Insure the Other 40%?
Not necessarily.
It's easy to assume that if your employer disability plan replaces 60% of your income, you can simply purchase an individual policy to cover the remaining 40%.
Disability insurance generally doesn't work that way. When determining how much individual coverage may be available, insurance companies consider your income along with disability coverage you already have.
The amount of additional coverage you may qualify for can depend on your income, existing benefits and the insurance company's guidelines.
The goal isn't necessarily to replace 100% of your income. It's to understand the gap that exists and determine how much additional protection may be available.
Wondering what that additional protection might cost? Learn what affects the cost of disability insurance.
So, Is My Employer Disability Insurance Enough?
Maybe.
After going through the audit, you may discover that your employer coverage does a very good job of protecting your income.
You may have a strong benefit, a generous monthly maximum, favorable plan provisions, adequate savings and other household income—and reasonably decide that additional coverage isn't necessary.
Or you may discover gaps you weren't aware of. Your bonus or commissions may not be covered. A monthly maximum may reduce your actual replacement percentage. Taxes may reduce the amount available to spend. Or the plan's definition of disability and portability may not provide the protection you expected.
The goal isn't to find a gap. The goal is to understand whether one exists.
Once you know what your employer coverage actually provides, you can make a much more informed decision about whether additional income protection is worth exploring.
The next step? Figure out how much income protection you may actually need.
When Is Individual Disability Insurance Worth Exploring?
Individual disability insurance may be worth exploring when your employer coverage leaves a meaningful gap between the income protection you have and the protection you want.
That might include situations where:
• A monthly benefit maximum limits how much of your income is protected
• Bonuses, commissions or other compensation aren't fully covered
• Tax treatment reduces the amount of your benefit available to spend
• You want coverage you personally own rather than relying entirely on an employer plan
• You want to explore contractual features that may differ from those in your employer coverage
None of these automatically means you need additional insurance.
They're simply reasons to take a closer look at what's available and decide whether additional protection would be valuable to you.
Want to learn more about personally owned income protection? Explore Protect Your Paycheck.
How Do I Review My Disability Coverage?
Start With What You Already Have
You don't need to become a disability insurance expert to take the first step.
Start with your employee benefits booklet, Summary Plan Description or other coverage materials and work through the questions in the Employer Disability Coverage Audit above.
Look beyond the percentage. Pay attention to what income is covered, the monthly benefit maximum, potential tax treatment, the definition of disability, how long benefits may continue and what happens if you leave your employer.
If you'd like help understanding your current coverage and whether additional income protection may be worth considering, StartSmart can help you review what you have and explore your options.
Ready to take a closer look? Review Your Income Protection.
Frequently Asked Questions
It depends. The percentage alone doesn't tell you how much of your actual income is protected. You also need to consider what earnings are covered, any monthly benefit maximum, potential tax treatment and your personal financial situation.
They can be. If your employer pays the premium, disability benefits are generally subject to federal income tax. If you pay the entire premium with after-tax dollars, benefits are generally received free from federal income tax.
If premiums are shared or paid pre-tax, the tax treatment can be different.
Potentially. Individual disability insurance may be available in addition to your employer coverage, but the insurance company will generally consider your income and existing disability benefits when determining how much additional coverage may be available.
Having 60% coverage through work doesn't necessarily mean you can simply purchase another 40%.
It depends on how your plan defines covered earnings or predisability earnings. Some plans may include certain bonuses, commissions or other incentive compensation, while others may base benefits primarily on salary.
Check your plan's definition of earnings rather than assuming all of your compensation is covered.
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