Disability Insurance Calculator

Group long-term disability is the most widely held and least closely read insurance most professionals own. It is presented as a single number — sixty per cent of income — and that number survives almost no contact with the certificate it comes from.

The first thing that shrinks it is the definition of covered earnings. Most group plans define it as base salary, excluding bonus, commission, and equity compensation. For someone earning $240,000 in salary and $60,000 in bonus, the sixty per cent applies to eighty per cent of actual income before anything else happens. For a commissioned salesperson whose variable pay is half of total compensation, the effect is far larger.

The second is the cap. Group schedules carry a maximum monthly benefit, commonly $10,000 or $15,000. Below the cap the percentage governs; above it the cap does, and the policy silently becomes a flat-dollar one. The practical consequence is that the effective replacement rate falls with every raise — the highest earners in a company are often the worst covered, and are usually the least aware of it.

The third is tax. It is the one people are most surprised by, but it is worth being precise about which of the three does the most damage, because the intuitive answer is wrong. Take the $300,000 earner in the default example and start from an idealised policy — sixty per cent of all compensation, no cap, funded with after-tax dollars. That replaces about ninety-one per cent of take-home pay. Removing one gap at a time from that ideal, the cap alone costs around thirty points, employer-paid tax about twenty-three, and the bonus exclusion about eighteen.

So for a high earner the cap is the single largest hole, not the tax treatment. Tax is the one that applies to everybody regardless of income, and the one that is fixable with a payroll election rather than a new policy — which is why it is worth understanding first.

Whether a disability benefit is taxable has nothing to do with its size and everything to do with who paid the premium. The IRS states the rule plainly: an amount received through an accident or health plan paid for by your employer must be reported as income, while a plan whose entire cost you paid on an after-tax basis produces benefits you do not report at all.

The trap sits in the middle case. Paying the premium yourself through a cafeteria plan feels like self-funding, but if the premium came out of pre-tax salary and was never included in your income, the IRS treats it as employer-paid and the benefit is fully taxable. A small deduction on a premium of a few hundred dollars a year buys a tax bill on a benefit of six figures a year, for years. It is one of the worst trades available in employee benefits, and it is the default election at a great many companies.

Where the premium is genuinely split and your share is paid after-tax, the benefit splits in proportion: only the part attributable to the employer’s payments is taxable. That makes the employee share unusually valuable per dollar, because it buys a permanently tax-free slice of a benefit that might run for decades.

The practical move, where an employer allows it, is to have the premium treated as imputed income — paying tax on a small premium now to make a large benefit tax-free later. Very few people are ever offered this choice explicitly, and fewer take it.

Comparing a benefit against gross salary is the wrong test, because you never had gross salary to spend. The honest comparison is the one this page makes: what arrives, net of tax, against what used to arrive, net of tax and payroll deductions.

Measured properly, the results are not what the headline percentage leads you to expect — in either direction. A sixty per cent policy covering all compensation with no cap in play replaces roughly sixty-seven to seventy-one per cent of take-home even when it is fully taxable, and eighty to ninety-four per cent when it is funded with after-tax dollars. Both are above sixty per cent, and they are above it for the same reason: the benefit is being compared against a salary that had already lost tax and payroll deductions, and the benefit itself is outside FICA and often taxed in lower brackets than the salary it replaces.

That is worth sitting with, because it inverts the usual advice. Tax does not, on its own, drag a sixty per cent policy below sixty per cent of take-home. What drags it below is the cap and the covered-earnings definition — and once those have done their work, tax is what turns a comfortable margin into a shortfall. The $300,000 earner in the default example lands at forty-seven per cent with an employer-paid, capped policy that excludes bonus, and at sixty-one per cent on the same policy funded after-tax.

The upper end of that range also explains a rule that otherwise looks arbitrary. Individual disability carriers cap coverage near sixty per cent of gross and reduce the percentage further at higher incomes, because a tax-free benefit at a higher percentage genuinely can leave a claimant better off not working: at one hundred per cent of covered earnings, tax-free, the same calculation returns more than one hundred per cent of take-home pay.

Two structural details belong in the same calculation. The elimination period — usually ninety or one hundred and eighty days — pays nothing at all, so it has to be funded from reserves that must survive the same event that ended your income. And group policies offset their payment by any Social Security disability award, so a successful SSDI claim does not raise the total. It does improve it, though, because the section 86 thresholds tax Social Security far more gently than ordinary income, and the resulting mix is better than the one it replaced.

The most consequential clause in any disability policy is the definition of disability itself, and it does not appear in any arithmetic. A true own-occupation policy pays if you cannot perform the duties of your specific occupation, even if you take other work. An any-occupation policy — the common group standard after an initial period, often twenty-four months — pays only if you cannot perform any work you are reasonably suited for. For a surgeon, a dentist, or a litigator, the difference between those two definitions is worth vastly more than a few percentage points of benefit.

Other terms move the value similarly without appearing in any calculation: whether the benefit period runs to age sixty-five or only for a few years, whether there is a cost-of-living adjustment, whether mental health and substance use claims are limited to twenty-four months, whether residual or partial disability is covered so a reduced ability to work is paid proportionally, and whether the policy is non-cancellable and guaranteed renewable or can be repriced.

Portability is the last one worth naming. Group coverage ends when the job does, and it ends precisely when a new medical history makes individual coverage expensive or unavailable. An individual policy bought while healthy is owned regardless of employer, which for anyone whose income depends on a specific skill is the substantive argument for holding one alongside the group plan rather than instead of it.