Long Term Disability (LTD) insurance is a critical component of financial planning, designed to replace a portion of your income if you are unable to work due to a prolonged illness or injury. Calculating the "LTD Rate" or premium cost involves understanding several variables including your gross salary, the benefit percentage offered by the policy, and the specific rate charged by the insurer per unit of coverage.
Key Variables in the Formula
The cost of LTD insurance is typically not a flat fee but a calculation based on the risk and the amount of income being protected. The primary inputs are:
Covered Payroll: This is the portion of your salary that is actually insured. It is derived from your gross monthly income but is often limited by a "Maximum Monthly Benefit."
Benefit Percentage: Most LTD policies cover between 50% to 70% of your pre-disability earnings. 60% is the industry standard.
Premium Rate: This is the cost factor determined by the insurance carrier. It is usually expressed as a dollar amount per $100 of covered monthly payroll (e.g., $0.50 per $100).
Benefit Cap: High-income earners may face a cap (e.g., $5,000/month), meaning they do not pay premiums on salary exceeding the amount required to reach that cap.
How the Calculation Works
To calculate your LTD premium manually, follow these steps:
Determine your Monthly Gross Salary (Annual Salary / 12).
Calculate the Potential Benefit by multiplying your monthly salary by the Benefit Percentage (e.g., 0.60).
Compare the Potential Benefit to the Maximum Monthly Cap. The lower of the two is your Actual Benefit.
Determine the Covered Payroll. If you hit the cap, your covered payroll is (Cap / Benefit %). If not, it is your full monthly salary.
Apply the rate: (Covered Payroll / 100) × Rate.
Example Scenario
Scenario: An employee earns $80,000 annually. The policy covers 60% of income with a rate of $0.45 per $100 of covered payroll. There is a monthly benefit cap of $5,000.