If you are applying for long-term disability (LTD) benefits, you are probably wondering how much money you will receive each month. 

Many people ask the same question: Is long-term disability pay based on gross income or net income?

In many LTD policies, disability payout benefits are calculated using your gross pre-disability income. That means the insurer usually starts with the amount you earned before taxes, Canada Pension Plan contributions, Employment Insurance premiums, pension deductions, union dues, or other payroll deductions came off your paycheque.

However, gross income is only the starting point to calculating the amount you will receive. The amount you actually receive can also depend on your policy wording, your type of income, whether your LTD benefits are taxable, whether other benefits reduce your payment (offsets), and whether your policy has a monthly maximum.

Because of this, many people are surprised when their first LTD payment arrives. 

This article focuses on private and group LTD insurance benefits in Nova Scotia. LTD policies are contract based, so the wording of your specific policy matters. While LTD policies vary across Canada, these general principles apply to many disability claims in Nova Scotia. Understanding how disability benefits work can help you avoid confusion and better prepare for the future.

What Is Gross Income?

Gross income is the amount you earn before deductions.

These deductions may include:

  • Income tax;
  • Canada Pension Plan (CPP) contributions;
  • Employment Insurance (EI) premiums;
  • Union dues; and/or
  • Benefit premiums.

For example, if your salary is $80,000 per year, your gross employment income is $80,000. This is the number that appears on your employment records is the amount you earned before deductions were taken from your pay. 

Many LTD policies use gross income, gross monthly earnings, or a similar concept when calculating benefits. The exact wording depends on the policy.

What Is Net Income?

Net income is your take-home pay. It is the amount left after taxes and other deductions have been removed. 

Using the same example, a person earning $80,000 per year may take home significantly less than that after payroll deductions, possibly about $60,000. Many people focus on net income because it is the money that actually reaches their bank account. 

Insurers, however, commonly start with gross income because it is easier to verify and apply consistently when calculating benefits for all workers, regardless of their case-specific payroll deductions.

Why Do Insurers Use Gross Income?

Gross income is easier to confirm. An insurer can usually verify it through pay stubs, T4 slips, payroll records, employment documents, and employer statements.

Net income is different; take-home pay can vary widely between employees with the same salary because they have different deductions. One employee may contribute more to a pension plan. Another may have different tax deductions. Someone else may pay union dues or benefit premiums.

Using gross income allows insurers to use the same method for everyone, providing a consistent starting point. That is why many LTD policies use gross income rather than net income.

How Are LTD Benefits Calculated?

Most LTD policies replace a percentage of your income. Many policies replace between 60% and 70% of your earnings, although the exact amount depends on the policy.

Here is a simple example. Emma earns $90,000 per year. Her monthly gross income is $7,500. Her disability policy replaces 66% of her income. The insurer multiplies $7,500 by 66%. Her monthly benefit would be about $4,950 before considering taxes, offsets, and policy maximums.

At first, the process seems straightforward. In reality, there are often other factors involved. The biggest question is usually what income counts toward the calculation.

Does All of Your Income Count?

Not always. 

Your regular salary is usually included. Other forms of income may or may not be included, depending on the wording of the policy.

For example, some workers earn significant overtime each year. One policy may count that overtime in the calculation. Another policy may exclude it or only include overtime if it was regular and recurring.

The same thing can happen with bonuses. Some policies include regular bonuses. Others exclude them entirely.

Commissions can create even more problems. Many sales employees earn a large part of their income through commissions. Some LTD policies include commissions when calculating benefits. Others use an average over several months or years.

This can make a major difference. 

Imagine two sales representatives who both earned $120,000 before becoming disabled. One had a policy that included commisions in pre-disability earnings. The other has a policy that excludes commissions. Even though they earned similar amounts before becoming disabled, they may receive very different benefits.

What About Self-Employed Workers?

LTD calculations can become more complicated for self-employed people and business owners.

Many business owners assume disability benefits will be based on total business revenue. That is usually not how disability income insurance works. Insurers often look at what the person actually earned after business expenses, not the total amount billed to clients or customers.

Imagine a consultant brings in $150,000 in annual revenue during the year. That sounds like a $150,000 income. However, the consultant may spend $50,000 on travel, office costs, software, and other expenses. In that situation, the income available to the consultant is closer to $100,000. The insurer may use the lower figure when calculating benefits.

This is why good records are important. Tax returns, notices of assessment, invoices, financial statements, and accounting records can help show how much income a person earned before becoming disabled.

Are LTD Benefits Taxable?

Sometimes. 

Whether your benefits are taxed often depends on who paid for the coverage. As a general rule, if you paid the entire disability premium yourself with after-tax dollars, the disability benefits are usually tax-free. If your employer paid all or part of the disability insurance premiums, the benefits are generally subject to income tax. This means taxes may be deducted from your monthly payments.

That can make a major difference over the course of a long claim.

If your employer paid, the amount you receive may be lower than you expected. For example, your policy may provide a benefit of $4,000 per month. If the benefit is taxable, the amount deposited into your account may be less than $4,000 after tax. Shared-premium plans can be more complicated. If both you and your employer contributed to the plan, you may be able to reduce the taxable amount by your own contributions.

Many employees are unsure who pays for their disability coverage. If you do not know who paid the LTD premiums, review your benefits package, check your pay stubs, collective agreement, employment contract, or ask your employer.

Why Is My LTD Payment Lower Than I Expected?

This is one of the most common concerns in LTD claims. 

Many people estimate their benefit using their salary and the percentage listed in their policy. Then the first payment arrives and the number is lower. There are several reasons this can happen.

One common reason is an offset. An offset allows the insurer to reduce benefits when you receive money from another source. CPP disability benefits are a common example. Many LTD policies require claimants to apply for CPP disability benefits. If CPP disability is approved, the insurer may reduce the LTD payment by some or all of the CPP disability amount, depending on the policy wording.

For example, suppose your LTD policy provides $3,500 per month. Later, you are approved for CPP disability and begin receiving $1,000 per month. If your policy allows a dollar-for-dollar CPP disability offset. Instead of receiving $3,500 from the insurer, you may receive $2,500 from the insurer and $1,000 from CPP disability.

Your total monthly income may remain the same, but the source of the money changes. This surprises many people. 

Some policies also allow offsets for workers’ compensation benefits, certain disability pensions, or motor vehicle accident benefits. The exact rules depend on the policy.

Benefit Caps Can Affect Some Workers

Many LTD policies have a monthly limit. This is called a benefit cap. The cap limits the amount the insurer will pay each month. For many workers, this never becomes an issue. For higher-income earners, it can make a significant impact. 

Imagine a policy replaces 66% of income but has a maximum benefit cap of $8,000 per month. A worker earning $75,000 per year may not reach that limit. A worker earning $200,000 per year might reach it quickly.

As a result, the higher-income worker may receive much less than 66% of their actual earnings. This is one reason some professionals and business owners buy extra disability coverage.

Group Disability Plans and Private Disability Policies

Not all disability policies work the same way. Many Canadians receive LTD coverage through their employer. This is typically a group disability plan. The employer arranges the coverage, and eligible employees are insured under the same policy.

Group plans can provide valuable protection. They are often less expensive than buying a private policy on your own. However, group plans may have limits.

For example, a group plan may:

  • have a lower monthly benefit cap;
  • limit what types of income count toward benefits;
  • contain more offsets than private policies.

Private disability policies work differently. A private policy is purchased directly from an insurance company. These policies can often be customized to fit a person’s needs. 

A private policy may: 

  • offer a higher monthly benefit;
  • fewer limitations; or
  • stronger protection for people with higher incomes.

Consider two workers who each earn $120,000 per year. The first worker relies only on a workplace disability plan. The second worker has both a workplace plan and a private disability policy. If both become disabled, the second worker may receive more income because of the additional coverage.

This does not mean private policies are always better. Every situation is different. The important thing is understanding what coverage you have and how it works. Many people do not read their disability policy until they need to make a claim. By that point, they may discover limits they did not know existed.

Taking a few minutes to review your coverage now can help you avoid surprises later. If you are unsure what type of disability coverage you have, ask your employer, plan administrator, or insurance provider for more information.

Can Insurers Make Mistakes?

Yes. 

Insurance companies handle many LTD claims every year. Most calculations are accurate, but mistakes can happen. 

An insurer may:

  • use the wrong earnings period;
  • leave out income that should have been included;
  • apply an offset incorrectly;
  • overlook commission, bonus, or overtime income;
  • misread the policy wording
  • apply the wrong benefit percentage; or
  • use incomplete payroll information.

Even a small mistake can become expensive. For example, if an error reduces your benefit by $200 per month, that is $2,400 per year. Over five years, that shortfall adds up to $12,000.

That is why it is important to review the calculation carefully. If something does not look right, ask questions.

What Should You Do If You Think Your Benefits Are Wrong?

If you think your LTD benefits were calculated incorrectly, do not ignore the issue. Start by asking the insurer for a written explanation. A written explanation can make it easier to spot mistakes.

Ask the insurer to identify common places where something could go wrong. 

Such as:

  • the income figure used;
  • the benefit percentage applied;
  • the period of earnings reviewed;
  • any income excluded;
  • any offsets applied;
  • any monthly cap; or
  • whether the benefit was treated as taxable or non-taxable.

Then, compare the insurer’s calculations with your own documents, like pay stubs, T4 slips, tax returns, employment contract, commission records, and bonus records. If something does not match, ask the insurer to explain the difference in writing.

Keep copies of everything you send or receive. It is also a good idea to keep notes of phone calls, including the date and the name of the person you spoke with, and what was discussed.

Sometimes the problem is a simple payroll or calculation error that can be fixed quickly. In other cases, there may be a disagreement about how the policy should be interpreted. Either way, asking questions early can help prevent a small issue from becoming a larger one later.

Documents That Can Help

If you think your benefits were calculated incorrectly, gather documents that show your income before disability.

Helpful records may include:

  • pay stubs;
  • T4 slips;
  • employment contracts;
  • tax returns;
  • commission records;
  • bonus records;
  • employer letters confirming income;
  • benefit booklets; or
  • overtime records.

Self-employed workers may also need financial statements or business expense records. These documents can help show how much you were earning before your disability began. They can also help identify mistakes in the insurer’s calculation.

Why Policy Wording Matters

No two LTD policies are exactly the same. That is why policy wording is so important.

One policy may include commissions. Another may exclude them. One policy may average earnings over the 12 months before disability; another may use a different period. One policy may have a high monthly maximum. Another may have a low cap. One policy may allow several offsets. Another may allow very few.

Because of these differences, two people with the same salary can receive very different benefit amounts.

If you have access to your policy, take time to read it. Pay attention to how income is defined. Look for any limits, offsets, or exclusions. The more you understand your policy, the easier it will be to understand your benefits.

When Should You Seek Help?

Many disability claims go smoothly. The insurer approves the claim and calculates the benefits correctly without a dispute. Sometimes, however, problems arise.

Sometimes the issue is not the amount of the benefit. Sometimes the insurer denies the claim completely. If your claim has been denied, it is important to understand why and what options may be available to challenge the decisions.

You should consider getting legal advice if: 

  • your claim is denied;
  • your benefits are reduced;
  • the insurer cannot explain how it calculated your payment;
  • your benefits are terminated;
  • you are asked to repay a large overpayment;
  • if important income appears to have been left out; or 
  • you are unsure about an appeal or lawsuit deadline.

In Nova Scotia, limitation periods can be very important in LTD disputes. While the Limitation of Actions Act generally provides a two-year limitation period for many civil claims, that is not always the deadline that applies. In some circumstances, the Insurance Act, another statute, or the terms of insurance policy may estavlish a more specific limitation period. Where a specific limitation applies, it generally takes precedence over the general limitation period

The safest approach is to not wait. If your LTD claim is denied, terminated, or significantly reduced, get advice early so you do not miss a deadline. Getting answers early may help prevent much bigger issues later.

Final Thoughts

So, is long-term disability pay based on gross or net income? 

In many cases, LTD benefits are based on gross pre-disability income. The insurer usually starts with the amount you earned before taxes and deductions. 

However, that is only the starting point. Taxes, offsets, benefit caps, commissions, bonuses, overtime, self-employment income, and policy wording can all affect the final amount you receive. That is why it is important to understand your coverage.

If you are applying for LTD benefits or already receiving them, review your policy carefully. Make sure you understand how your payment was calculated. Compare the insurer’s numbers against your income records. If something does not make sense, ask questions in writing.

Long-term disability benefits are meant to help replace lost income when an illness or injury prevents you from working. Understanding how those benefits are calculated can help you better protect your finances and avoid surprises during an already difficult time.

If you are having a dispute with your insurer about LTD benefits, the team at NOVA Injury Law is here for you.

If you have questions about your accident claim, contact NOVA Injury Law for a free consultation.

Phone: 902-442-8853

Email: info@novainjurylaw.com

This article is for informational purposes only and does not constitute legal advice.