Most Employees Don’t Know What Their Disability Coverage Actually Pays. Most Employers Don’t Either.
Ask a room of HR leaders what their long-term disability plan pays and you’ll hear a confident number. Ask how long an employee waits before that payment starts, what “disabled” means in the contract, or whether the benefit is taxable, and the room gets quiet.
That gap matters. LTD protects an employee’s income when they can’t work for months or years. It’s also the benefit behind the hardest conversations HR ever has: the claim that pays less than someone expected, or stops sooner than they planned. Here’s what to know before that conversation happens.
STD and LTD do two different jobs
Short-term disability covers the first stretch of a leave, typically for 17 to 26 weeks. Some employers skip an insured STD plan entirely and rely on EI sickness benefits, which now pay up to 26 weeks.
LTD picks up where STD ends. Its waiting period, called the elimination period, is often 119 days (about 17 weeks) so it lines up with the end of STD. From there, LTD can pay until the employee recovers or reaches age 65.
The check:does anything fall between the cracks? If STD ends at 17 weeks and LTD doesn’t start until 26, an employee on a long claim goes roughly two months with no income.
What LTD actually pays
Most plans replace 60% to 70% of gross monthly earnings, up to a monthly maximum. That maximum is where higher earners get caught.
Take an employee earning $150,000 a year, or $12,500 a month. At 67%, they’d expect about $8,375. If the plan caps benefits at $5,000 a month, they receive $5,000. That’s 40% of their income, not 67%.
Two more details worth knowing:
- Offsets.LTD payments are usually reduced by other disability income, such as CPP disability benefits or workers’ compensation.
- Non-evidence maximum.Above a certain coverage amount, the carrier requires medical evidence. If an employee never submitted it, their coverage stays capped at that lower amount, often without them knowing.
The definition of “disabled” changes partway through
Most Canadian LTD plans start with an “own occupation” definition: the employee qualifies if they can’t do the essential duties of their own job. After a set period, commonly 24 months, it shifts to “any occupation”: they must be unable to do any job they’re reasonably suited for by education, training or experience.
That switch is where many claims end. Employees rarely hear about it until they’re living through it.
Who pays the premium decides whether the benefit is taxed
This one surprises almost everyone. If the employer pays any part of the LTD premium, the benefit is generally taxable income when the employee receives it. If employees pay the full premium themselves, the benefit is generally tax-free.
A $4,000 monthly benefit that’s taxed can land closer to $3,000 in someone’s account. That’s why many employers structure LTD as employee-paid, and why it’s worth explaining the choice to your team rather than burying it in a benefits booklet.
Mental health has changed the claim picture
Mental health conditions are now among the leading causes of LTD claims in Canada, and those claims tend to run longer. That makes early intervention, EAP access and return-to-work support part of your disability strategy, not a separate wellness line item. Many carriers offer early intervention programs within the plan. Ask whether yours does, and whether anyone is using it.
Five questions to ask before your next renewal
- What’s our elimination period, and does it line up with STD or EI?
- What’s our monthly maximum, and how many employees earn more than it fully covers?
- What’s our non-evidence maximum, and who is above it without having submitted evidence?
- When does the definition switch from own occupation to any occupation?
- Is LTD employer-paid or employee-paid, and have we explained the tax impact to our people?
LTD isn’t glamorous. Nobody accepts a job offer because of an elimination period. But when someone on your team needs it, it becomes the most important benefit you offer.
If you couldn’t answer all five questions from memory, you’re in good company. That’s exactly what a disability coverage review is for.
Review your disability coverage with a Sterling advisor at sterlingbrokers.com.