Private Long-Term Disability Insurance

Definition

Private long-term disability (LTD) insurance replaces a share of a worker's pre-disability earnings when illness or injury prevents sustained employment. In the United States, LTD is typically provided by employers as a group benefit (list-billed policies) covering roughly one-third of the civilian workforce. It operates in parallel with Social Security Disability Insurance (SSDI) but has dramatically different incentive structures, eligibility timelines, and exit rates.

Key Ideas

Three core plan parameters govern claiming incentives:
1. Elimination Period (EP): The waiting period between disability onset and first benefit payment (modal values: 90 or 180 days). Functions like a deductible — deters short spells.
2. Replacement Rate (RR): Benefits as a share of pre-disability earnings (modal value: $\approx 60\%$ ). Higher RR raises claiming probability; estimated elasticity of accessions with respect to RR $\approx 4.0$ (cap-adjusted: $\approx 1.4$ ).
3. Maximum Monthly Benefit cap: An absolute dollar ceiling that compresses effective replacement rates for high earners.
LTD policies typically offset SSDI dollar-for-dollar: if a claimant later receives SSDI, the LTD benefit is reduced by the SSDI award amount.
$\approx 41\%$ of LTD spells eventually co-occur with an SSDI award (Autor, Duggan, and Gruber 2014).

How It Works

A worker becomes disabled, waits out the Elimination Period using sick leave or savings, then files an LTD claim. The insurer adjudicates the claim against a medical definition of disability (typically own-occupation for the first 24 months, then any-occupation). Benefits are paid until return to work, recovery, reaching Social Security Full Retirement Age, or policy exhaustion. Because LTD offsets SSDI, the effective marginal benefit of LTD for a claimant who would otherwise receive SSDI equals the LTD benefit minus the SSDI offset.

Behavioral responses arise through two channels:

Moral hazard (accession margin): More generous plans induce more claims. Replacement rate elasticity $\approx 4.0$ for raw accessions; $1.4$ cap-adjusted. Both far exceed SSDI elasticity estimates.
Deterrence (EP margin): Longer EPs deter workers from filing when their expected spell is shorter than the EP. $\approx 40\%$ of the EP-accession relationship is behavioral deterrence; $\approx 60\%$ is mechanical censoring of genuinely short spells.

The deterrence mechanism is consistent with forward-looking moral hazard (workers calculate expected net benefit of filing) rather than liquidity constraints (income-invariance of deterrence rules out the latter).

Why It Matters

SSDI reform: LTD's high exit rate ( $\approx 12.7\%$ /quarter vs. SSDI $\approx 2\%$ /quarter) shows that disability need not be permanent; marginal SSDI enrollees have meaningful work capacity. Supports Autor-Duggan (2010) proposal to use LTD as a transition state before SSDI entry.
Plan design: Employer plan-design choices (EP, RR) have large effects on claiming behavior and costs. A firm that shifts from a 90-day to a 180-day EP roughly halves LTD accessions, mostly by censoring short spells.
Selection into severity: Longer EPs select in more severely disabled workers, raising average spell duration conditional on accession. The workers deterred are the least severe (return-to-work types, not future SSDI recipients).

Open Questions

How generalizable are the elasticity estimates from large-employer list-billed LTD to individual-market policies or SSDI?
Would a mandatory LTD waiting-room proposal (Autor-Duggan 2010) reduce or redirect SSDI growth, or merely delay it?
What are the welfare effects of deterrence — are deterred workers better off (avoiding unnecessary benefit dependency) or worse off (liquidity-constrained and unable to recover)?