What Is LTD on Your Paystub? Long-Term Disability Explained
LTD is the premium for long-term disability cover. What it insures, how much income it replaces and why paying the premium with after-tax money can be the better choice.
LTD on a pay stub is the premium for long-term disability insurance. It is a small deduction protecting against one of the larger financial risks a working person faces: losing the ability to earn for an extended period.
What It Actually Covers
Long-term disability replaces part of your income when illness or injury prevents you from working beyond a defined waiting period, known as the elimination period, often 90 or 180 days. Short-term disability typically covers the gap before LTD begins. Benefit levels commonly replace between 50% and 70% of base pay, sometimes capped at a monthly maximum.
Note the words base pay. Many policies exclude bonus and commission, which matters a great deal if a large share of your income is variable.
The Tax Point Worth Understanding
Who pays the premium determines how the benefit is taxed. If your employer pays it and the amount is not included in your income, benefits you later receive are generally taxable. If you pay the premium with after-tax dollars, benefits are generally received tax free.
This is why some employers offer the choice of paying the premium post-tax. Paying a small premium with after-tax money converts a potentially taxable benefit into a tax-free one, which is usually the better trade when you consider that a disability benefit has to cover living costs.
Own Occupation Versus Any Occupation
Policies differ on what counts as disabled. An own-occupation definition pays if you cannot perform your own job. An any-occupation definition pays only if you cannot perform any job you are reasonably suited to. Some policies apply the first for an initial period, then switch to the second. The definition matters more than the headline percentage.
I go through the policy terms, the elimination period and the taxation question in my explainer on LTD deductions for Online Paystub.
Before You Opt Out
The premium is usually modest relative to what it protects, and group coverage is generally cheaper and easier to qualify for than an individual policy. If you are considering declining it, compare the cost against the number of months you could sustain your household without income.