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Long-Term Disability

THE BASICS

What is Long Term Disability?

Long-term disability insurance replaces a defined portion of an employee’s income during a prolonged absence caused by illness or injury. Coverage begins once short-term disability (STD) or Employment Insurance (EI) benefits are exhausted — and can continue for years, in many plans to age 65.

Short-term disability bridges the initial weeks. Our short-term disability guide sets out how that stage works. LTD is the coverage that sustains an employee once it ends.

Healthwise – LTD Timeline
Illness or injury Non-work related
STD / EI Weeks 1–26
LTD begins After STD exhausted
To age 65 Many plans
Long-Term Disability Plan Design for Employers – Healthwise Benefits
Coverage type LTD
Long-Term Disability Replaces income when a serious illness or injury prevents an employee from working for an extended period.
Benefit duration To 65
Coverage Until Retirement In many plans, LTD can continue until age 65 — sustaining income through a prolonged disability.
All-source ceiling 85%
Maximum Total Income Most plans cap the combined income from all disability sources at 85% of pre-disability earnings.
Tax Treatment

Employer-Paid vs. Employee-Paid

Whether an LTD benefit is taxable is governed by a single factor: who funds the premium. Its source determines how benefits are treated at claim time.

Employer pays premium · $70,000 salary 75% Benefits are taxable Set higher to offset tax
Monthly earnings$5,833
LTD benefit (75%)$4,375
Est. tax withheld~$610
Net monthly~$3,765
Employee pays premium · $70,000 salary 66⅔% Benefits are tax-free Full benefit at claim
Monthly earnings$5,833
LTD benefit (66.67%)$3,889
Tax withheld$0
Net monthly$3,889

Illustrative only. Tax withheld varies by province and individual circumstance. The disability tax credit may reduce the effective rate on taxable benefits.

Benefit Structure

Single, Two, and Three-Tier Designs

An LTD benefit is calculated as a percentage of monthly earnings, applied up to a maximum. The number of tiers defines how that percentage applies across salary levels.

01
Single-Tier (Flat)
One percentage applies to all earnings up to the plan ceiling. Straightforward — suits groups with a narrow salary range. Higher earners may replace a smaller share.
One % · All earnings
02
Two-Tier
Higher % on the first earnings band, lower above a threshold — e.g. two-thirds on the first band, one-half above it. Sustains coverage for higher earners while containing cost.
Two bands · Controlled cost
03
Three-Tier
Three bands for the most precise control over cost and replacement ratio. Suits groups spanning front-line staff through to senior leadership.
Three bands · Full control
The Ceiling

The All-Source Maximum

Most group LTD plans cap the total income an employee may receive while on claim at a set percentage of pre-disability earnings — commonly 85%. This all-source maximum applies to the LTD benefit plus all other disability income: workers' compensation, other group or government plans, and similar sources.

When the combined total would exceed the ceiling, the LTD benefit is reduced by the excess.

✓ Room to spare 66% LTD benefit alone
⚠ All-source ceiling 85% Total income cap
LTD benefit sits here
0% 25% 50% 75% 85%+
66.67% Benefit — Room to spare
$70,000 salary example
LTD benefit (66.67%)$3,889/mo
85% ceiling$4,958/mo
Room under ceiling$1,069/mo
Other income allowed before reduction ~$1,069
75% Benefit — Near the ceiling
$70,000 salary example
LTD benefit (75%)$4,375/mo
85% ceiling$4,958/mo
Room under ceiling$583/mo
Other income allowed before reduction ~$583
CPP/QPP disability is treated separately — as a direct offset to the plan's payment, not part of the all-source calculation.
How It All Fits Together

Three Decisions, One Plan

Tax treatment, tier design, and the all-source maximum work together. Set deliberately, they establish how effectively the plan protects income for the entire workforce — from the newest hire to senior leadership.

01
Tax Treatment
Determines how much of the benefit the employee actually receives. Employer-paid = taxable. Employee-paid = tax-free.
02
Tier Design
Determines how the benefit is calculated across salary levels. Single, two-tier, or three-tier — each shapes cost and replacement differently.
03
All-Source Maximum
Sets the ceiling the total income from all sources cannot exceed. Modelling all three together gives an accurate picture of what the plan pays.
Common Questions

Frequently Asked Questions

When does LTD begin?
LTD begins once STD or EI sickness benefits are exhausted — typically after 17 to 26 weeks. The plan's elimination period must be satisfied first.
How long can LTD benefits last?
In most group plans, LTD benefits can continue until age 65, provided the employee continues to meet the definition of disability under the plan.
Is employer-paid or employee-paid better?
Neither is universally better — the right choice depends on your workforce's salary profile. Employee-paid delivers more net income at claim; employer-paid keeps cost visible to the company.
What is the non-evidence maximum (NEM)?
The NEM is the coverage available without medical underwriting. Amounts above it require individual evidence of insurability. It varies by carrier and plan size.
Does CPP disability affect LTD benefits?
Yes — CPP/QPP is a direct offset to the LTD plan's payment. It reduces what the plan pays but is not part of the 85% all-source calculation.
What's the difference between LTD and STD?
STD covers the first weeks of a disability — typically 17 to 26 weeks. LTD takes over after and can continue for years. Together they create a continuous income-replacement chain.

Want to See How This Applies to Your Group?

A plan review models tax treatment, tier design, and the all-source maximum against your actual workforce and salary profile. We set out the structures and the options — clearly and without the jargon.

Build My Benefits Strategy
We're Here to Help

Questions?

Not sure how LTD fits into your existing benefits plan, or want to review the structure you currently have? Reach out anytime — we'll walk you through it clearly and without the jargon.

Katrina Sinclair Group Benefits Advisor · Healthwise Benefits 778.554.6676 katrina@healthwisebenefits.ca

Sources

CRA — Wage-loss replacement plans

Government of Canada (FCAC) — Disability insurance