To calculate an LTD premium, multiply your covered monthly earnings by the benefit percentage, divide the result by 100, and multiply by your carrier’s rate per $100 of coverage. For a worker earning $5,000 a month with a 60% benefit and a rate of $0.50 per $100, the monthly premium is $15. The arithmetic takes under a minute. Gathering the right inputs, and understanding why your rate is set where it is, takes a little longer.
The Four Inputs You Need
Four figures drive the calculation. All of them appear in your Summary Plan Description or certificate of coverage for a group plan, or in the quote letter for an individual policy. Under ERISA, a plan administrator must furnish these documents on written request, so you can ask for a copy at any time.
Covered Earnings
Your premium is based on “covered earnings,” which is usually narrower than your total pay. In most group plans, covered earnings means base salary plus any pre-tax deferrals into a 401(k), 403(b), or similar retirement plan. Bonuses, commissions, overtime, stock options, and other variable pay are typically excluded. If you earn $75,000 in base salary and $25,000 in commissions, the premium (and your future benefit) will likely run on $75,000, not $100,000.
Benefit Percentage
This is the share of covered earnings the policy replaces if you become disabled. Most group plans set it at 60% or 66⅔%. A plan document from a major carrier describes the standard this way: “66⅔% of your eligible earnings, up to a maximum benefit.” Individual policies sometimes offer higher percentages at steeper premiums.
Elimination Period
The elimination period is the waiting time between the start of your disability and the first benefit payment. Think of it as a time-based deductible, and a longer wait saves money. One carrier’s rate sheet puts a 180-day elimination period at 0.143% of insured earnings and a 90-day period at 0.173%.
Premium Rate
The rate is what your insurer charges per unit of coverage. Carriers express it either as a flat dollar amount per $100 of covered monthly payroll or as a percentage of insured earnings. Both methods produce the same answer when applied correctly. Your policy documents will tell you which format your carrier uses and what your specific rate is.
Working the Formula Step by Step
With a $60,000 annual salary, a 60% benefit percentage, and a rate of $0.50 per $100 of coverage:
- Step 1 — Monthly earnings. Divide annual salary by 12. $60,000 ÷ 12 = $5,000.
- Step 2 — Covered benefit. Multiply monthly earnings by the benefit percentage. $5,000 × 0.60 = $3,000. This is the monthly amount the policy would pay during a qualifying disability.
- Step 3 — Coverage units. Divide the covered benefit by 100. $3,000 ÷ 100 = 30 units.
- Step 4 — Monthly premium. Multiply the units by the rate. 30 × $0.50 = $15.00 per month.
If your carrier expresses the rate as a percentage of earnings rather than a per-$100 figure, skip steps 3 and 4 and multiply the covered benefit by the percentage. Using the same salary with a rate of 0.173% of insured earnings: $5,000 × 0.00173 = $8.65 per month. Either path should match what shows up on your billing statement or paystub. When it doesn’t, the discrepancy usually traces back to an outdated salary figure on file or a mid-year rate change, and your benefits administrator can reconcile it.
Finding Your Share in a Group Plan
Group plans frequently split the cost between employer and employee. To find your portion, you need the total premium and the employer’s contribution percentage. If the total premium is $40 per month and your employer covers 75%, you pay the remaining 25%, or $10, deducted from your paycheck. That deduction usually appears under a specific disability or insurance code on your paystub.
The split also affects whether a future benefit would be taxable, so it’s worth asking HR how your plan is structured before open enrollment closes.
What Drives Your Rate
The rate plugged into the formula isn’t arbitrary. It reflects the insurer’s statistical estimate of how likely you are to file a claim and how long that claim would last.
Occupation
Insurers sort applicants into occupational risk classes. A desk-bound accountant files fewer disability claims than a construction worker, and premiums reflect that gap. Most carriers maintain classification tables assigning a risk tier to hundreds of specific job titles. Change roles inside your company and your rate class could shift at the next renewal.
Age and Gender
The probability of a long-term disability rises with age, so premiums increase as you get older. Gender also affects pricing: historical claims data shows different disability patterns for men and women, and most states still permit insurers to use gender as a rating factor for disability coverage.
Tobacco Use
Nicotine use pushes the rate up significantly. Smokers face elevated risks for the cardiovascular and respiratory conditions that generate long-term claims, and carriers price accordingly.
Benefit Period
The benefit period is how long the policy pays once you qualify. Common options are 2 years, 5 years, 10 years, or until age 65. Longer benefit periods cost more because the insurer’s potential payout is larger. Most group plans default to benefits lasting until age 65, while individual policies offer more flexibility to choose a shorter and cheaper term.
Disability Definition
Policies that use an “own occupation” definition, where you qualify as disabled if you can’t perform the specific duties of your current job, cost more than “any occupation” policies, which require you to be unable to perform any job you’re reasonably suited for. Many group plans use a hybrid: own-occupation for the first 24 months, then switching to any-occupation for the remainder of the benefit period. The hybrid keeps premiums lower than a pure own-occupation policy while still providing stronger early protection.
Optional Riders
Add-on features raise the premium. A cost-of-living adjustment (COLA) rider, which increases your benefit annually to keep pace with inflation, typically adds 10% to 20% to the base premium. Other common riders include future purchase options, letting you increase coverage later without new medical underwriting, and residual disability benefits, which pay a partial benefit if you can work part-time but not full-time. Each rider has a separate cost that stacks on top of the base rate.
Mental Health Benefit Limitations
Many group LTD policies cap mental health and substance abuse claims at 24 months, even when the overall benefit period extends to age 65. Insurers argue these conditions are harder to verify objectively and carry a higher risk of prolonged claims. A policy with the 24-month cap is cheaper than one offering full parity. All major carriers offer parity as an option; whether your plan has it depends on what your employer chose to buy.
A Reasonableness Check on the Result
If you want to gauge whether your premium looks right, individual long-term disability coverage generally costs between 1% and 3% of annual salary. Someone earning $50,000 might pay $60 to $125 per month; at $100,000, the range runs roughly $83 to $250 per month. Group coverage through an employer is almost always cheaper because the insurer spreads risk across the whole workforce and doesn’t individually underwrite every participant. Group rates can run 50% to 70% less than comparable individual policy rates, which is why employer-sponsored LTD is worth a close look at open enrollment even when the benefit percentage looks modest.
Why the Formula Result Isn’t Always What You’d Receive
The premium formula tells you what you pay. It doesn’t tell you what the policy would actually pay out, because two provisions can shrink the benefit side of the equation.
First, most group plans impose a maximum monthly benefit regardless of what the percentage calculation produces. Common caps fall between $5,000 and $10,000 per month. At a $200,000 salary, a 60% benefit would theoretically be $10,000 per month, but a $5,000 cap would cut that in half. High earners should check the plan’s maximum carefully.
Second, most LTD policies contain a Social Security offset. If you qualify for SSDI while receiving LTD benefits, the insurer reduces its payment dollar-for-dollar by your SSDI check. Your total monthly income stays the same; more of it just comes from Social Security and less from the carrier. If your LTD benefit is $3,000 and SSDI pays $1,200, the carrier pays $1,800. Some policies also offset dependent benefits paid to a spouse or child based on your record. Policies generally guarantee a minimum monthly benefit of $50 to $100 after all offsets.
Neither cap nor offset changes your premium. Both change what the formula’s benefit figure means in practice.
Get the Actual Documents Before You Run the Numbers
Every input in the formula lives in your Summary Plan Description or certificate of coverage: the covered earnings definition, benefit percentage, elimination period, rate, maximum benefit, and offset provisions. Under ERISA, your plan administrator must furnish these documents on written request. Shopping for individual coverage? The insurer’s quote letter will carry the same information.
Don’t run the formula with assumptions. The most common premium miscalculations happen when people use gross salary instead of covered earnings, or forget that a benefit cap limits what the percentage formula actually pays out. Pull the documents, confirm each number, and the math from there is a minute’s work.