What Are Long Term Disability Benefits Offsets?
What Are Long Term Disability Income Offsets?
In the Long Term Disability Benefit context, offsets are other sources of employment or employment-like income. Offsets will be deducted from the amount of Long Term Disability benefit allowed to a claimant by an insurance company.
How Does LTD Coverage Work?
Insurers typically design their insurance Long Term Disability coverage contracts so they become ‘payers of last resort.’ This means that other sources of employment income are deducted, or offset from what the LTD insurer would otherwise pay in Long Term Disability benefits.
If you’re a unionized public servant, your LTD coverage is provided by SunLife and if you’re a public service executive, the insurer is Industrial Alliance. For public servants, SunLife and Industrial Alliance are the only alternatives. If you work in the private sector and your employer is providing LTD coverage, the offsets will likely be similar to those in the public service plan. If you’re insuring yourself, you can always negotiate fewer offsets, but they will cost you more money in premiums. If you don’t want any offset, the better alternative might be Critical Illness Insurance, which gets you a specific fixed payment for a specific injury or illness.
Here are some examples of how LTD coverage works:
- Suppose you have LTD benefits which pay you $5,000 per month and you become eligible for a pension or a medical retirement which pays $3,000 per month. The insurer will see this new source of income and reduce the payment of $5000 to $2000 per month. The employee will still have a monthly income of $5,000, but it will consist of two cheques totalling $5,000, of which the insurer will only pay the difference between the pension and the original LTD benefit.
- Suppose you are unable to work and you’re not able to provide the same level of financial support to your family. It’s likely that you think you’re going to get LTD benefits plus Canada Pension Plan Disability (CPPD) and your kids are going to be looked after, at least to some extent. If you are getting $1,000 a month from LTD, but your CPPD gives you $800 a month and there’s a $200 monthly child benefit for each of your three kids, that’s a total of $1,400 a month from sources outside your LTD payment. All that money, including the $200 for the children, are classified as offsets and will reduce your LTD to zero.
- If you are in a car accident and you are paid damages for injuries, that would not be an offset. If you are paid damages for loss of income that would be an offset.
- Savings or registered retirement savings plans (RRSPs), are not considered offsets and cannot be deducted from Long Term Disability benefits.
Can the Insurer Force You to Apply for Long Term Disability Offsets?
The answer will depend upon the language of the particular insurance policy. Frequently, the answer will be yes, particularly for such benefits as Canada Pension Plan Disability Benefits. If the insured person fails to apply for the CPPD benefits, the LTD insurer will assume they have and will deduct the value of that benefit from the LTD, even if they do not apply.
In the case of CPPD, that value is approximately $14,000 annually. There may even be an obligation to appeal from a negative ruling concerning CPPD.
For benefits such as pensions, if a person is in receipt of a pension, that amount will likely be considered an offset and deducted.
If a person is not getting a pension, whether they must apply for a pension will usually depend on the language of the insurance policy.
Severance is usually considered an offset and the insurance company will deduct 100% of it from LTD. So, there can be substantial benefits to remaining an employee while you’re on LTD and it may not be necessary to terminate your employment. This is important because many people who lose their job and go on LTD prior to getting a severance package, think they will get to keep both. If maintaining your employment status is not possible, there are strategies that might be available that allow you to keep some or all of the severance package.
The takeaway here is that you should not assume you are going to have multiple sources of income if you are on LTD because the insurance company will want most of it. The insurance companies say that without offsets, everyone’s premiums would be higher. This is true, but they will not give people the option of paying higher premiums in exchange for greater protection. The complexities of Long Term Disability are not something most people even think about. They get a job, they take the benefits they are offered and forget about it . . . until they are faced with dealing with long-term sickness or injury.
Is Long Term Disability Insurance Mandatory?
No, it is not a legal requirement but you would be unwise not to have it.
The biggest financial asset for most people is not their house but their ability to work. Simply put, if you and your family need income in order to live, you need Long Term Disability insurance, which will give you 50-70 percent of your former income. Without LTD, you are left with the Ontario Disability Support Programme at around $10,000-$12,000 a year and Canada Pension Place Disability which is around $14,000 a year. If you were making a reasonable income prior to your injury, going down to that level is not pleasant.
Have questions? Reach out to our team of experienced Long Term Disability lawyers to learn more about LTD coverage.