How Much Does Long-Term Disability Pay If You Can’t Work?

You probably insure your home, your car, maybe even your phone. But what about your income? If you’re ever too sick or injured to work, long-term disability (LTD) insurance is designed to replace a portion of your paycheck. 

Exactly how much does long-term disability pay? The short answer is up to about 60% of your gross income. However, the actual disability benefits you receive can vary greatly depending on how your policy is structured and what type of disability you’re facing.

Understanding the basics: How much does long-term disability pay?

Most long-term disability insurance policies aim to cover around 60% of your gross income — not your take-home pay. Several key factors influence how much long-term disability insurance pays out, including but not limited to:

• Type of coverage. Own-occupation policies pay benefits if you can’t work in your specific field, even if you could technically do another job. Whereas, an any-occupation definition of disability makes it significantly harder to qualify for benefits.
• Policy riders. Optional add-ons like future purchase options (FPO), benefit increase riders (BIR), cost-of-living adjustment (COLA) riders and catastrophic coverage can significantly increase your potential total payout.
• Benefit periods. How long you receive benefits will depend on your chosen benefit period, ranging from a couple of years up to age 65 or older. The longer you receive benefits, the higher the potential cumulative payout.
• Benefit caps. Most disability insurance providers have a maximum monthly benefit of around $15,000 to $30,000, depending on your occupation and whether your policy was fully underwritten medically.
• Taxation. Benefits from individual policies are tax-free since you pay premiums with after-tax dollars. However, group LTD policies, such as those with employer-paid premiums, generally have taxable benefits — which means you’ll keep less in your pocket overall.

Note that some LTD policies reduce your monthly payout if you receive Social Security disability benefits. However, for individual disability policies, this only applies if you’ve opted for a social insurance rider to reduce your premiums. This rider requires you to apply for Social Security Disability Insurance (SSDI) when you make a claim against the policy. Your benefit amount will be reduced until you’re denied SSDI benefits, which can take up to a year or more in some cases. However, once denied, the policy will pay out in full.

Examples of policy decisions that impact how much long-term disability pays

To show just how much your payout can vary, let’s look at a typical disability insurance policy from one of the “Big 5” disability insurance providers for specialty-specific coverage.

Let’s say we’re insuring Philip, a 30-year-old endocrinologist who just finished residency and has an own-occupation policy with a $10,000 monthly benefit. His benefit period allows for disability payments until age 65. Therefore, his policy has a potential base benefit of $120,000 per year and a maximum cumulative base benefit of $4.2 million ($10,000 x 12 months x 35 years).

If Philip becomes permanently disabled and can’t return to endocrinology, his base policy alone could pay out millions of dollars (depending on when he becomes disabled). And with a “true” own-occupation definition of disability, he could still earn an income in another field without losing his benefits.

But that’s just the start of how much his long-term disability might pay.

How the cost-of-living adjustment rider pays off over time

Philip’s policy includes a 3% compound inflation rider, which will increase his benefit each year he remains disabled. Here’s how the inflation rider can translate to huge benefits over time:

• In year 1, he’ll collect $10,000 per month.
• By year 10, his benefit will be around $13,400 per month.
• By year 15, it’s over $15,500 per month.
• By year 25, his monthly benefit will exceed $20,900 per month.

This compounding growth can dramatically increase the overall value of the policy, especially for those who become disabled early in their career.

Now let’s imagine a more serious scenario in which Philip isn’t just unable to work in his specialty — he’s severely disabled and can no longer do basic daily living activities, such as washing and dressing himself. In this case, a catastrophic disability rider will pay an additional monthly benefit to help cover the cost of medical care and support services.

Philip’s catastrophic disability benefits total $8,000 per month on top of his $10,000 base benefit. That’s $18,000 per month, and with time, it’ll be much more, considering the inflation rider will apply for both the base benefit and catastrophic benefits until age 65.

Student loan rider: Side benefits for your student debt

Philip’s policy also includes a student loan rider that covers his loan payments if he becomes disabled. His policy pays $2,000 per month for the first 10 years, potentially adding up to $240,000 in additional, tax-free benefits.

However, not everyone needs a student loan rider, considering it comes with an additional cost. 

For example, if you only have federal student loans, an income-driven repayment (IDR) plan will adjust your payments based on your taxable income (which could be $0 if you’re surviving on tax-free disability benefits). Additionally, you might be better off increasing your overall base benefit instead of spending money on a limited student loan rider.

That said, if you have private student debt, the student loan rider can serve as an extra layer of protection for the unexpected.

Mental health disability claims: Policy limitations matter

Most people don’t consider how their mental health could impact their ability to work or their disability coverage. However, mental health and nervous disorders like depression, anxiety, bipolar disorder and post-traumatic stress disorder (PTSD) can be just as disabling as physical injuries.

If you already have a diagnosis, the insurance company will usually treat it as a pre-existing condition and exclude it from the definitions of disability in your policy. But if it develops after you purchase the policy, you should be able to file a claim.

So, how much does long-term disability pay for a mental health claim? In most cases, mental health disabilities are treated the same as physical health claims in terms of the monthly benefit amount. However, some policies include a mental health limitation, which caps the length of time you can collect benefits for psychiatric claims. These are most common in group disability policies, but they can also show up in individual disability coverage, depending on your state of residence and occupation.

Let’s say Philip develops major depressive disorder and can no longer work. His disability policy would pay the normal $10,000 per month. But his policy includes a 24-month mental health limitation. Therefore, his disability benefits would end after two years. That means he would receive a maximum payout of $240,000, plus a small increase in year two from the inflation rider. 

Note that most policies don’t require a mental health limitation. In fact, many individual policies, particularly those from the “Big 5”, offer the option to remove or avoid this benefit cap altogether. But not knowing whether your policy includes a mental health limitation could mean the difference between two years of financial support versus three decades of income protection.

Partial disability benefits when you’re not fully out of work

Disabilities aren’t always all or nothing. Many people are still able to work with a disability by reducing hours or job responsibilities. In which case, a partial or residual disability rider can help bridge the income gap.

Let’s say Philip develops chronic back pain and can no longer manage a full workweek. Instead of working five days, he cuts back to three and loses 40% of his income. Because his policy includes a partial disability rider, he’ll receive $4,000 per month (40% of his monthly benefit) until he’s able to return to full capacity.

If he’s never able to return to full-time work, Philip will continue collecting his $4,000 benefit until age 65 — and he’ll benefit from the 3% compounding inflation rider each policy anniversary date.

How much does long-term disability pay? It depends on your policy

There’s no one-size-fits-all for disability insurance. Your actual disability benefits depend on your income, the structure of your policy (e.g., definition of disability, policy riders and benefit period) and the type of disability you experience.

Whether it’s a total disability, mental health condition or an injury that results in a partial loss of income, the right policy can protect your financial future with tax-free benefits for decades to come.

If you already have a policy, take a few minutes to dig into the details. Know your benefit amount, policy riders, tax treatment and any potential policy limitations. If you don’t have coverage yet — especially if you’re in the early stages of your career — this is one of the most important income protection moves you can make.

A well-built policy will protect a meaningful portion of your specialty income throughout your career. In some cases, your disability payout might even exceed what you expected to earn if life had gone according to plan. Just remember, what you choose today impacts your payout later.

SLP Insurance helps physicians and other professionals compare specialty-specific disability coverage without the sales pressure. We’ll help you navigate key policy decisions, track down the best available discounts and ensure your coverage is designed to deliver the most benefits. Fill out the form below to receive a free, personalized quote.