Flat vs. Graded LTD

Flat vs. graded long term disability

All Source Maximum

Also known as the coordination level, the all-source maximum is used to ensure a plan member’s income while on disability bears a reasonable relationship to his or her pre-disability earnings. This provides an incentive to return to work by ensuring that disability income does not exceed the plan member’s pre-disability income.

Flat and Graded Schedules

A flat percentage can be used to calculate premiums but may not be accurate as it does not consider the differences in income and tax rates among plan members. A graded formula takes into account a plan member’s gross income, net income and the maximum a plan member can collect.

Plan members with a non-taxable plan and high-income plan members should consider a graded schedule. Plan members with higher earnings pay a greater portion of their income taxes, and with a flat schedule, the all-source maximum can end up being lower than their LTD benefit amount. This creates a gap between the insured benefit amount and the amount that is actually eligible to collect.

On the other hand, a graded schedule takes into account differences in income and tax rates, and resolves this issue by paying a lower percentage of disability benefits at higher income levels for non-taxable plans.

Example:

  • Jane’s monthly earnings are $7,500 ($90,000 per year)
  • The LTD benefit formula is 66.67% of monthly gross earnings (pre-disability earnings)
  • The all-source maximum is 85% (LTD plan in non-taxable)

LTD benefit:  $7,500 x 66.67% = $5,000

Net monthly earnings: $7,500 – deductions* = $5,246

All-Source Maximum:  $5,246 x 85% = $4,459

This means that Jane is paying premium on $541 of LTD benefits that she will never be able to collect ($5,000 - $4,459 = $541).

*deductions include federal and provincial taxes, CPP and EI.

Payout TypeGross Annual SalaryPayout
Graded Formula $30,000 1,663
All-Source Maximum $30,000 1,703
Flat 66.67% $30,000 1,667
Graded Formula $60,000 3,113
All-Source Maximum $60,000 3,150
Flat 66.67% $60,000 3,333
Graded Formula $90,000 4,313
All-Source Maximum $90,000 4,459
Flat 66.67% $90,000 5,000
Graded Formula $120,000 5,513
All-Source Maximum $120,000 5,665
Flat 66.67% $120,000 6,667
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