Your year-end bonus and any other extra compensation may affect your long term disability claim or the amount of benefits you will receive. The specific language of your policy and the timing of your bonus will determine how your long term disability insurer will look at your bonus. For specific answers, consult a long term disability attorney to do a thorough review of your compensation and your long term disability policy.
Bonuses Before Filing a Long Term Disability Claim – Prior Income
Generally speaking, if you receive a bonus before filing a long term disability claim, the insurance company should include that bonus as part of your prior income. Your prior income is used to calculate how much you will receive in monthly LTD benefits. Changes in prior income can have a significant impact on the amount of money you will receive each month while receiving long term disability benefits.
Typically, monthly long term disability benefit payments are calculated as a percentage of your prior income. For instance, many employer-provided policies state that you are entitled to receive between 50% and 75% of your prior income each month in long term disability benefits.
The definition of prior income varies widely from policy to policy. Sometimes prior income is termed base earnings, prior earnings, pre-disability income or earnings, or simply “income.” No matter what term is used, the definition should provide details about what income is included in the calculation. After reviewing the definition of predisability income or prior income in your policy, use our long term disability benefits calculator to ascertain your long term disability benefit amount, and how your benefit will be determined.
In some policies, prior income can include “one-time or periodic” payments such as year-end bonuses and other extra compensation. If the policy definition of prior income includes bonuses and you received a bonus or other form of extra compensation prior to filing your claim, the insurance company must include that in its benefit calculations.
In other policies, prior income is defined as an average over a period of time, such as the 24- or 12-month period immediately prior to your disability. If the policy defines prior income in this way, bonuses will only be included in the calculation if you received them at some point during the period (e.g., 6 months before filing).
And in other policies, bonuses are explicitly excluded from the definition of prior income. If your policy defines prior income in this way, the insurance company will not consider bonuses when calculating your monthly benefit amount.
Bonuses After Filing Long Term Disability Claims – Ongoing Earnings
If you receive a bonus after filing your long term disability claim, the insurance company will typically not include it in its benefit calculations. Long term disability benefits are usually based on what you were earning at the time of your disability, not on potential future income. This means that any bonuses or other extra compensation received after filing your claim will not affect your benefits.
Receiving a bonus after filing a long term disability claim may still affect your benefits. The insurance company may apply offset or “set-off” rules to your benefit payments. Set-off rules allow the insurance carrier to reduce or offset LTD benefits with income that you receive after filing your claim. This could include bonuses and other forms of extra compensation.
In most cases, if the insurance company applies a set-off to your LTD benefits, it is only allowed to do so up to the amount of money stated in the policy definition. For instance, if your policy definition states that “Benefits shall be reduced by 50% of any income received”, the insurance company can only reduce your benefit payments by 50% of your bonus.
It is important to note that some Long Term Disability policies do not include set-off rules or allow for any reduction or offsetting of benefits with income received after filing a claim. If your policy includes such language, the insurance company cannot apply a set-off to your benefit payments.
Bonuses For Partial or Residual Disability Claims
Bonuses can affect a partial or residual disability claim differently than they would affect a total disability claim. Partial disability means you are able to work and earn some income, but not as much as you did prior to becoming disabled. The amount of residual disability benefits is based on how much you are earning now versus how much you earned before your disability.
Typically, you must have a loss of income of at least 20% of prior income to receive partial or residual disability benefits.
In most long term disability policies, partial or residual long term disability benefits are calculated as follows: ((A-B)/A) x C where A is your prior income, B is your current income, and C is the amount of benefits you would receive if you received total disability benefits rather than partial disability benefits.
Some policies have an initial period of 6 to 24 months during which there is a more generous calculation. And some policies provide the total disability benefit if your loss of income exceeds a certain percentage of prior income - usually an 80% loss.
In a partial disability claim, the insurance company will consider any bonuses or extra compensation you receive for periods before you became disabled in determining your prior income - just as it would if it was a total disability claim.
In addition, for bonuses received for periods after you become disabled, the insurance company will use bonuses to calculate your residual benefit amount. Your bonus may affect your long term disability benefit only for the month you receive it. Or, the insurance company may divide the bonus by the number of months contained in the period the bonus applies to. Look to the specific language of your policy to determine if the bonus will only affect one month or if it will be spread out over a longer period of time.
Conclusion
The effect that bonuses have on Long Term Disability benefits varies widely depending on the language of your policy and the timing of the bonus. If you received a bonus or other form of extra compensation prior to filing your Long Term Disability claim, it may be included in the calculation of benefits. However, bonuses received after filing a Long Term Disability claim typically do not affect benefits.
In some cases, the insurance company may be allowed to reduce or “set-off” your LTD benefit payments with income received after filing your claim. It is important to review the language of your policy carefully in order to determine how bonuses and other forms of extra compensation will affect your Long Term Disability benefits.
If you have any questions, an experienced Long Term Disability attorney can help. Whether you have already been approved for long term disability benefits, you've been denied, or you are thinking about filing a claim, the Maddox Firm can help.