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Navigating the Long Term Disability All Source Maximum Clause

LTD litigation can be confusing and overwhelming at the best of times.   Especially when trying to navigate taxation issues, the application of offsets, who is first payee, etc..  One of the most misunderstood issues is the all source maximum clause.

There is an “all source maximum” clause” in most LTD policies.

LTD policies normally replace between 60-85% of your pre-disability income.  The all source maximum clause is a contractual term that is inserted to incentivize a claimant to return to work. By placing a ceiling on the amount of money you can earn via LTD benefits, they are encouraged to return sooner.  The all source maximum clause normally states that while receiving LTD benefits, your net income cannot exceed 80-85% of your pre-disability net income. This can be an issue if your LTD benefits are not taxable.

For example, if Claimant A had a gross monthly income of $10,000, and has an LTD policy that pays him/her 75% of the pre-disability gross income ($7,500), Claimant A would expect to receive $7,500 of non-taxable income per month.  However, earnings on $10,000 per month would be taxed in Nova Scotia at a rate of blended rate of roughly 35%.  That means in this example that pre-disability monthly net earnings would total $6,500; but post-disability net earnings would be much higher – $7,500 per month.  The LTD insurer would then expect to pay no more than 85% (or 80%) of $6,500 ($5,525) which is a significant reduction in monthly income from $7,500 (75% of $10,000 per month).

The manner in which the all source maximum clause is framed can mean a difference of several thousand dollars a year, and it is critical that it is considered with care.  If you have any questions about the all source maximum clause or any other LTD issue or situation, please reach out and one of our experienced lawyers will be happy to answer any questions you may have.

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