Long-term disability (LTD) insurance provides income replacement if an employee is unable to work for an extended period due to a serious illness or injury. Employers can pay for it or offer it as a voluntary benefit, with employees contributing through payroll deductions.
What you’ll learn
What you’ll learn
Key takeaways
- Long-term disability insurance replaces a percentage of an employee’s income during an extended medical absence.
- Businesses can offer this as a voluntary benefit, so employees get group rates without the company footing the whole bill.
- If employees pay their own premiums using post-tax dollars, the benefits they receive during a disability are tax-free.
- Aligning your short-term and long-term disability policies helps recovering employees avoid a gap in their income.
While short-term disability (STD) typically covers the first few months of an absence, LTD coverage generally begins after that initial period ends and can last for several years — or even until retirement age, depending on the policy.
In this guide, we’ll explore long-term disability insurance options and break down the pros and cons. Whether you are building your first perks package or comparing small business benefits providers to upgrade your coverage, we’ll help you decide if adding LTD is the right move for your growing team.
What does long-term disability insurance cover and what are its key benefits?
LTD policies typically replace a percentage of the insured’s pre-disability income, and they include an elimination period before benefits begin. The industry standard is typically 60% of a worker’s normal income. However, plans are usually very specific and cap payouts at a certain amount. For example, a policy might cover 60% of an employee’s monthly income, up to a maximum of $3,000 per month. Because of these caps, high-income earners may hit the maximum limit quickly.
Good to know: The elimination period
“First time you are hearing this term? It’s simply a waiting period that an employee must complete before they can file a benefits claim. For LTD, an employee may need to wait up to 90 days before they are eligible to file a claim. This is why most companies choose to offer both short-term and long-term disability insurance together.”
— Andrew Rothenberg, OnPay's Vice President of Insurance
Possible conditions
- Coverage may apply to a wide range of medical conditions, including chronic illnesses, severe injuries, and long-term health complications that prevent an employee from returning to work.
- Beyond basic income replacement, policies may also include coverage for partial disability, cost-of-living adjustments, survivor benefits, and pension supplements.
Key benefits of offering long-term disability
Providing this coverage has advantages for both you and your staff:
- Income stability for your team: It offers long-term income stability during life-altering events.
- Stronger benefits package: Adding LTD strengthens the overall benefits package and reinforces a commitment to employee security and retention.
- Flexible employer funding: Long-term disability can add deeper financial protection to your benefits package — without requiring you to fully fund the coverage.
Long-term disability considerations for businesses with under 50 employees
Small business owners with fewer than 50 employees often assume long-term disability insurance is out of reach or too expensive. But offering this coverage is actually a powerful way to compete for top talent against larger corporations.
Insights from the field
According to the OnPay 2025 Small Business Outlook, nearly 20% of small business employers have disability insurance on their wish list of benefits they want to offer their teams in the future.
With a smaller team, the main consideration is likely going to be the minimum participation requirement. Many insurance carriers require a certain percentage of your staff to enroll to qualify for group rates.
A common mistake newer employers make is assuming they have to foot the entire bill to make the plan work. You can actually offer LTD as a voluntary benefit — meaning employees pay the premium — while still giving them the advantage of your company’s discounted group rate. It’s a win-win: your team gets access to a valuable safety net, and you add to your benefits package without taking on a heavy financial lift.
Next, let’s see what questions you’ll want to have ready when talking with brokers.
What questions should an employer ask when evaluating policies?
When comparing group LTD policies, asking the right questions upfront saves you and your team from surprises later. As you evaluate options, focus on the details that impact your employees the most:
- What is the elimination period? This tells you how long an employee must be out of work before benefits kick in, which is usually 90 to 180 days.
- How does the policy define disability? You need to know if it covers workers when they can’t do their specific job, or only if they can’t do any job at all.
- What percentage of income is covered? Most policies cover 50 to 70 percent of an employee’s salary, but you should always check for a monthly maximum cap.
- How do benefits coordinate with Social Security? Almost all group long-term disability plans coordinate with Social Security. Disability insurers frequently offset benefits payable under private insurance dollar-for-dollar with Social Security Disability Insurance (SSDI) payments.
- How does the policy interact with workers’ compensation? Ask your broker if the carrier streamlines claims. Some carriers allow an approved workers’ compensation claim to automatically trigger a short-term disability claim. This means that if an employee gets hurt on the job, they can receive dual benefits without having to fill out twice as much paperwork.
How does it work with state-mandated disability programs?
Depending on your state, there may already be a disability insurance program on the books. You need to evaluate how a state policy interacts with a private separate policy. Ask your broker which one pays first and whether you can combine them. If this is confusing, talk with your broker, who can help you understand the ins and outs.
— Andrew Rothenberg, OnPay's Vice President of Insurance
Individual vs. group LTD policies
If you’re weighing whether to offer a group LTD plan or let employees buy individual policies, it helps to understand the trade-offs.
| Feature | Group LTD policies | Individual LTD policies |
| Setup | Ease of administration | Setup can be cumbersome. |
| Underwriting | Often feature “guaranteed issue” coverage, meaning no medical exam is needed. | Could have more strict medical underwriting and limiting. |
| Access and usage | Over 30 percent of workers in private industry participate in long-term disability income insurance. | Typically bought by self-employed professionals or business owners for key-person protection. |
For small business owners, a group policy gives your whole team an accessible, affordable safety net they likely wouldn’t seek out or qualify for on their own.
Taxability of LTD benefits paid with pre-tax vs. post-tax dollars
The taxability of long-term disability benefits all comes down to how the premiums are paid. This is an area where business owners often get confused, so let’s break it down.
Employer-paid vs. employee-paid premiums
If you pay the premiums as the employer, or if your employees pay them using pre-tax dollars through payroll deductions, any disability benefits paid out later will be subject to income tax. Because the premium was tax-free upfront, the payout is taxed on the back end.
Conversely, if employees pay their own premiums using post-tax dollars, the benefits they receive during a disability are entirely tax-free. Since LTD only replaces a percentage of their regular income, having those benefits paid out tax-free makes a massive difference for a recovering employee.
Pro tip
You have flexibility when building your benefits program strategy. For example, you might offer a base policy that is fully employer-paid, alongside a supplemental policy that is employee-paid. Talk with your broker about your strategy, as it often makes sense to set up disability premiums using post-tax dollars so you are not paying as many taxes.
Transitioning from short-term to long-term disability
Managing an employee’s extended medical leave requires a smooth handoff between short-term disability (STD) and long-term disability. As an employer, your goal is to help them bridge the gap without missing a paycheck.
As we touched on earlier, an LTD policy has an elimination period — a waiting period of 90 to 180 days before benefits kick in. A common mishap is mismatching these two timelines, leaving a recovering employee without income for several weeks. If you offer both, ideally, you want to align your STD policy to cover the employee for the duration of that elimination period so there is no gap when the short-term policy ends and the long-term policy starts.
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“OnPay made my payroll so straightforward and manageable. OnPay representatives have been so helpful, patient, and knowledgeable. The customer service is top-notch! I love having them on my small business team.”
— Korin Beckham, Anderham Creative
To handle the transition, communication is key. Provide them with the necessary LTD claim forms and assist them in gathering their medical documentation. Keep in mind that approval for STD doesn’t guarantee automatic approval for LTD, so starting the paperwork early helps make a seamless transition.
Leaves administration
If you have employees in multiple states, it’s best to consult with your broker and have them assist. They can help you navigate compliance or connect you with companies that specialize in leaves administration to streamline the process.
Add long-term disability insurance is your to-do list
Whether you decide to cover the costs or add a policy to your perks program as a voluntary product, a long-term disability policy goes a long way to protect the people who work for you. Employees get peace of mind and income replacement for life-altering events that keep them away from work. And employers add value to their benefits package and reinforce a commitment to employee security and retention. If you have any questions, OnPay’s team of benefits experts is here to help!
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.