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Employee Benefits

How Long-Term Disability Coverage Works on a Graded Scale

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According to The Council for Disability Awareness, more than one in four 20 year olds will become disabled at some point before retirement. Disability can affect anyone, at any time in life. While many disabled people can continue working in some capacity, that’s not always possible. Life altering accidents and illnesses can impact a person’s ability to function in the workplace. Some people may be unable to work for months or years, if they’re ever able to work again.

Being unable to work due to a disability can be financially stressful—this is why long-term disability coverage exists. Designed to offer financial support to employees dealing with a disability, this coverage pays employees a portion of their pre-disability income in the event they become disabled for an extended period. This type of coverage kicks in after short term disability coverage runs out.

Employers who want to start offering long term disability coverage need to begin by carefully considering the right options for their employees.

Know the Options for Long-Term Disability Coverage               

Long-term disability coverage usually kicks in after short-term disability, E.I. benefits and sick leave benefits from an employer come to an end.  Long-term disability can be calculated in two ways:

1. Flat Schedules

If you opt for flat schedules, a flat percentage will be used to calculate your employees’ long-term disability premiums. For example, if you have a flat schedule, employees could receive two-thirds (or some other flat percentage) of their pre-disability earnings if they become disabled.

2. Graded Schedules

A graded schedule takes multiple factors into account rather than using a simple percentage to calculate premiums. The graded schedule is a formula that considers factors like each plan member’s gross income and net income, as well as the maximum benefit they’re permitted to collect.

Possibility Erosion of Long-Term Disability Benefits        

At first glance, a flat schedule may seem like the best way to calculate long term disability benefits. After all, isn’t it fair to use the same calculation for everyone? Unfortunately, it’s not quite that simple.

The complication is caused by something called the all-source maximum. This is a clause in most long-term disability contracts that ensures employees don’t earn more from long term disability payments than they did when they were at work. The all-source maximum usually limits employees’ long term disability payments to 85 per cent of their pre-disability income, according to Benefits Canada. This can vary, so check your contract.

Due to this all-source maximum, some of your employees could end up being eligible for a lower level of coverage than they think they are. This can happen with your higher-income employees who pay a greater portion of income tax compared to your lower-income employees.

For example, employees who think they’re covered for $5,000 a month could end up only receiving $4,500 a month due to the all-source maximum. These employees could be upset to learn about the difference in coverage, especially if they don’t find out until they actually need the benefits. Explaining the reasons for this discrepancy can be challenging since flat scales and all-source maximums are concepts that many people aren’t familiar with.

Providing Accurate Benefits with a Graded Scale  

To avoid the appearance of eroded benefits, you can choose graded-scale calculations instead. Instead of using a flat percentage for everyone, these schedules consider more information about each employee. With this additional information included in the calculations, you can provide more accurate benefit levels to your employees.

By providing more accurate calculations, you can confidently tell your employees how much coverage they can rely on if the worst happens. This ensures your employees won’t be disappointed later by inaccurate calculations.

Your employees need long term disability coverage. This type of coverage can help protect their finances if they become disabled and unable to work. To ensure your employees aren’t disappointed by their coverage levels, consider a graded schedule.

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Debbie Russell

Debbie Russell

Debbie is the assistant vice president in the Calgary office of GroupQuest Benefits Resources Inc., partnering with Group Insurance Advisors to support and help grow their employee benefits businesses. Debbie has over 30 years’ experience in the insurance industry. She understands building relationships is what drives this business. She holds the Certified Health Insurance Specialist (CHS) and Group Benefits Associate (GBA) designations and is a member of Advocis. On a more personal note, Debbie enjoys good food, good wine, and having a good time with family and friends. She loves golfing, camping, hiking and travelling.

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